Shifting Time Horizon Of Investors Driving S&P 500

From time to time, the S&P 500 (Index: SPX) experiences Lévy flight events. These are periods where stock prices move by a much larger-than-typical amount, which coincide with changes in the forward time horizon of investors.

The stock market's first Lévy flight event of 2021 took place during the third week of January. Here, Netflix' (Nasda: NFLX) announcement they would no longer need to borrow to finance the cost of new programming prompted investors to shift their forward-looking focus outward, from 2021-Q2 to the distant future quarter of 2021-Q4. That kind of change constitutes a Lévy flight event for the stock market, which directly coincides with larger-than-typical changes in stock prices.

The final week of January 2021 saw that process play out in reverse, as investors shifted their forward-looking focus back to the nearer term future quarter of 2020-Q2 in the second Lévy flight event of the year. The latest update to the alternate futures chart shows these changes against the backdrop of the various levels of dividend futures-based model projects the S&P 500 would be based upon how far into the future investors are fixing their attention in making current-day investment decisions.

(Click on image to enlarge)

Alternative Futures - S&P 500 - 2021Q1 - Standard Model (m=+1.5 from 22 September 2020) - Snapshot on 29 Jan 2021

As Lévy flight events go, the recent volatility in stock prices caused by these shifts of investor time horizons has been relatively muted. While crossing the threshold of being "interesting", which we define as the S&P 500 changing in value by two percent or more at the close of trading from the previous day's closing value, the expectations for changes in the growth rate of dividends per share at the future points of time investors have focused upon aren't very different from one another, which accounts for that muted performance.

On the other hand, if investors were to suddenly focus on 2021-Q1, we would see a much larger, downward move in stock prices from their current levels, which would be driven by new information. Speaking of which, here is our rundown of the new information to which investors reacted during the last week of January 2021.

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