S&P 500 In First Lévy Flight Event Of 2020
The S&P 500 (Index: SPX) continued its record-setting rally, breaking through the 3,300 level and closing the week at a new record high closing value of 3,329.62. That new record comes as investors appear to be shifting their forward-looking focus, as anticipated, from 2020-Q1 toward 2020-Q4 as indicated on the following chart.
(Click on image to enlarge)
Through the close of trading on Friday, 17 January 2020, the dividend futures-based model that underlies the alternative futures chart above indicates that investors are now dividing their attention between 2020-Q1 and 2020-Q4, with stock prices rising, but not as fast as the model suggests they would have if investors had remained fully focused on 2020-Q1.
The direction that the S&P 500 will take going forward will depend upon how closely investors might fix their attention on either 2020-Q1 or 2020-Q4 as they make their current day investment decisions, where our thinking is that 2020-Q4 will demand more of their focus given the elevated probability of that more distant future quarter coinciding with the timing of the Federal Reserve's next action for setting short term interest rates in the U.S. The CME Group's FedWatch tool continues to show investors are giving better-than-even odds of a quarter point rate cut taking place during 2020-Q4.
(Click on image to enlarge)
On a side note, we often describe shifts in the forward-looking focus from one point of time in the future to another as the quantum part of the quantum random walk that stock prices periodically follow. Unlike the nearly instantaneous quantum leaps that take place with subatomic particles however, stock prices tend to take somewhat longer to move from one alternative trajectory to another, which we have come to associate with stock prices undergoing a Lévy flight phenomenon. The often outsized changes that take place at these times are what give stock prices their fat-tailed distributions, where large changes in stock prices occur more often than would be predicted by a normal distribution.
This latest shift qualifies as the S&P 500's latest Lévy flight event, although in this case, even though there is a comparatively large gap between the alternative trajectories associated with investor expectations for 2020-Q1 and 2020-Q4, the alternative trajectories the describe the potential paths the S&P 500 might follow are such that the overall change in stock prices will be considerably smaller than it would otherwise have been if the timing of the shift in investor focus had occurred either a week earlier or a week later. In a sense, the S&P 500 is following a path that takes the least amount of energy for it to follow as it transitions from one level to another.
Let's get to the news of the week that was. The following headlines capture the more significant market-moving events that occurred during the second full week of January 2020.
Monday, 13 January 2020
- Crude exports boom on U.S. Gulf Coast, allaying bottleneck fears
- Fed's Rosengren warns of inflation risks to central bank's 'almost ideal' economic outlook
- Bigger trouble, stimulus developing in China:
- China's economic growth set to slow to 30-year low this year; more government support seen: Reuters poll
- China steel mills cut back on high-grade iron ore as margins slump
- China vehicle sales fall 8.2% in 2019: industry association
- Auto industry cautious as China starts 2020 with forecast of a 2% sales decline
- China disposes of $289 billion of bad loans in 2019: regulator
- Wall Street hits record, boosted by trade and earnings optimism
Tuesday, 14 January 2020
- Oil edges up after five days of losses ahead of U.S.-China trade pact
- Fed will continue repo offerings into February, reducing term operations
- Fed's George says keeping interest rates on hold 'appropriate' for now
- Signs of previous stimulus gaining traction in China:
- Wall Street dips from record in 'Jason Bourne market'
Wednesday, 15 January 2020
- OPEC expects lower demand for its oil as U.S. hits new milestone
- With a mixture of fanfare and grievance, Trump signs U.S.-China trade deal
- Bigger trouble developing in the Eurozone: German growth slows sharply in 2019 as trade disputes bite
- Bigger stimulus developing in China: China will increase effective investment: Premier Li
- Fed's minions share opinions on policies, economic outlook:
- Dow closes above 29,000 after China and U.S. sign trade truce
Thursday, 16 January 2020
- Oil ends higher, as trade deal progress spurs energy demand hopes
- U.S. Senate approves U.S.-Mexico-Canada trade deal
- Bigger trouble, stimulus developing in China:
- Fed's Bowman: Current interest rate likely appropriate for "this year"
- S&P 500 blasts through 3,300 as tech stocks surge
Friday, 17 January 2020
- Oil steadies as Chinese economy offsets trade optimism
- U.S. economy looking stronger than expected:
- Bigger stimulus developing in China:
- Fed minions share opinions on yield curve, Fed policies:
- Wall Street hits new highs in strongest week since August
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