It's amazing what you can do with just four additional days worth of data!

Last week, we presented two new potential scenarios to explain why the S&P 500 (SPX) has been behaving as it has in recent weeks. This week, thanks to having four extra days worth of data, we can now narrow the picture down to a single scenario that explains the S&P 500's trajectory.

Here's that single scenario, presented in a single chart:

Going back to 11 June 2020, when the S&P 500 suddenly plunged by 5.9%, we think the hypothesis that this outcome was influenced by the combined effect of two significant shifts in investor expectations was correct. The first part of the shift occurred as investors incorporated the new expectation that the Federal Reserve's monetary policies going forward would be less expansionary than they had previously anticipated, which the dividend futures model captures as a change in the value of the amplification factor, which went from a value of -1 to approximately zero.

The second part of the shift occurred simultaneously, as investors also shifted their forward-looking time horizon to focus away from 2020-Q4, where their attention had been steadily held since 1 May 2020, to instead focus on the nearer term quarter of 2020-Q3 in a new Lévy Flight event.

Those two conditions then held until 24 June 2020, when it appears that investors once again adjusted their expectations of the future for the Fed's monetary policies be even less expansionary. When that happened, we can see the trajectory for the S&P 500 following the dividend futures-based model's projection for investors focusing their attention on 2020-Q3, which is what allows us to confirm the Lévy Flight event from 11 June 2020. If investors had instead been consistently focused on 2020-Q4, the decline of the S&P 500 on 24 June 2020 would have been more severe.

Instead, we see the trajectory of the S&P 500 follow the projected path associated with investors focusing their forward-looking attention on 2020-Q3 for another day, followed by a relatively small Lévy Flight event on Friday, 26 June 2020, when investors appear to have shifted their focus from 2020-Q3 outward to the more distant future quarter of 2020-Q4.

That's where the additional four days worth of data come in handy. During the Fourth of July holiday-shortened trading week ending on 2 July 2020, the trajectory of the S&P 500 generally followed the projected path associated with investors continuing to focus upon 2020-Q4 through the rest of the week, falling well within its expected range and allowing us to confirm the second Lévy Flight event of June 2020.

Which is all pretty cool for explaining what happened during the last month of the best quarter the S&P 500 has had since 1998. And, if we're right, there may be an extra bonus. The S&P 500 would also appear to be leaving the upside down and returning to the right side up, which is a more normal state of affairs for how stock prices behave.

As for what the potential future for the S&P 500 looks like with the return to the right side up, assuming it holds, we're afraid you'll have to wait until next week when we roll out the alternative futures chart for 2020-Q3. Until then, here are the market moving headlines we tagged during the comparatively uneventful week that was for the index!

Monday, 29 June 2020

• Daily signs and portents for the U.S. economy:
  • Oil rises on improving economic data but new coronavirus cases loom
  • U.S. home contracts post record jump, factory activity improves in Texas
  • White House opposes $1.5 trillion House infrastructure measure
• Bigger trouble developing in China:
  • China's factory activity likely slowed in June on subdued global demand, Reuters poll shows
  • China state firms' profits fall 52.7% year-on-year in Jan-May: finance ministry
• Fed minions implementing bigger monetary stimulus, have dour view of future:
  • Fed opens primary market corporate bond facility
  • Fed's Powell stresses uncertainty, challenges facing U.S. economy
  • Fed's Daly says 'far too early' to judge U.S. recovery
• Bigger stimulus developing in the Eurozone, Bank of Japan's monetary policy choking banks:
  • Euro zone needs loose monetary policy until inflation goal near, says Villeroy
  • ECB stimulus plan meets court requirements: German finance minister
  • Yield curve control a double-edged sword for BOJ as low rates strain banks
• Wall Street ends higher on Boeing bump, stimulus eyed

Tuesday, 30 June 2020

• Oil slips slightly on rising coronavirus cases, returning Libyan supplies
  • OPEC oil output sinks as Saudi deepens cuts and others cut more, survey shows
• Bigger taxes developing in Brazil:
  • Brazil's debt and deficit hit record highs in May, outlook darkens
    • Brazil's Guedes sees public deficit above 15% of GDP, debt above 100%
    • Brazil's Guedes says he likes idea of a transactions tax
• Bigger fiscal stimulus developing in U.S., Australia:
  • U.S. Senate Republicans to push next coronavirus aid bill in late July
  • Australia central bank urges ongoing government stimulus for economy
• Fed minions talking much, doing less?
  • Fed's offered flood of credit so far just a trickle in practice
  • Fed officials stress need to factor in structural inequities when evaluating economy
  • NY Fed's Williams says full recovery will likely take years
    • NY Fed's Williams says no decisions being made on yield curve control
• Bigger trouble developing all over:
  • Pandemic will keep lid on central bank rates, ECB's de Guindos says
  • China's factory activity quickens, but pandemic drags on exporters and recovery
  • Japan factory output slumps as economy sinks deeper in recession
• S&P 500 ends best quarter since 1998 on a high note

Wednesday, 1 July 2020

• Daily signs and portents for the U.S. economy:
  • Oil rises over 1% on U.S. crude stockpile draw, manufacturing activity
  • U.S. loan issuance plummets in second quarter as market takes stock of new normal
  • U.S. employers announced more job cuts in June: report
• Bigger fiscal stimulus being negotiated in the U.S.:
  • U.S. Democrats push to extend $600 weekly coronavirus unemployment benefit (incentives to stay unemployed)
  • Trump backs work incentives as part of next stimulus bill (incentives to go back to work)
  • U.S. Senate votes to extend small-business aid program through August
• Fed minions preparing for more monetary stimulus, see long recovery:
  • Fed policymakers committed to providing open-ended support to U.S. economy, minutes show
  • Fed's Daly sees four to five year recovery in best-case scenario
  • Fed revisits idea of pledging to keep interest rates low
  • Fed received thousands of letters asking it to widen Main Street program
• Bigger trouble still developing in Asia:
  • Japan's new auto sales skid 23% year-on-year in June: industry data
  • China's factory activity expands, but job losses quicken amid weak exports: Caixin PMI
  • South Korea's June factory activity shrinks for sixth month: PMI
• Path to big bank bailouts being paved in Eurozone as ECB minions hit "pause" button:
  • ECB lowers bar for bank mergers in hope of spurring consolidation
  • Euro zone's recovery fraught with risks, ECB's Panetta says
  • ECB's Lane signals policy pause as markets stabilize
    • German economy gradually recovering after pandemic slump: Ifo
• S&P, Nasdaq close higher on vaccine hopes, improving data

Thursday, 2 July 2020

• Daily signs and portents for the U.S. economy:
  • Oil up more than 2% on U.S. jobs data but virus fears cap gains
  • U.S. job growth roars back, but COVID-19 resurgence threatens recovery
  • Amid strong June job growth, signs U.S. recovery may be stumbling
• Fed minions weigh future:
  • Investors rethink yield curve control horizon as Fed raises doubts
  • Fed's Bullard warns of financial crisis risks as virus cases spike: FT
• Wall Street closes higher after biggest payrolls jump on record