The S&P 500 In Week 4 Of September 2017
It's time once again to look both backwards and forwards for the S&P 500, where in the fourth week of September 2017, the index closed at a new all time high!
(Click on image to enlarge)
After adjusting for the echo effect, where the past volatility of the stock prices that we use as the base reference points for projecting future stock prices affects the accuracy of our dividend futures-based model's projections, we find that the level of the S&P 500 is consistent with being on the high end of the trajectory associated with 2018-Q2, which suggests that investors are mostly focused on this future point of time.
Mostly, but not entirely. Having the S&P 500 tracking along near the top end of our adjusted forecast range for 2018-Q2 is an indication that investors are splitting a portion of their forward-looking attention between 2018-Q2 and at least one other point of time in the future, which our model suggests is either 2017-Q4 or 2018-Q3. Of these quarters, 2017-Q4 is significant in that, as of the close of trading on 29 September 2017, investors are expecting that the Federal Reserve will next act to increase short term interest rates in the U.S. in that quarter, while it appears that 2018-Q3 will coincide with another action by the Fed to increase the Federal Funds Rate further.
The table below shows the probabilities of the size and timing of the Fed's next increases in its Federal Funds Rate that the CME Group's FedWatch Tool was indicating for each of the indicated future quarters. The data for 2018-Q3 is a new bit of information that was added during the last week, which wasn't available at the time of our last update.
Probabilities for Target Federal Funds Rate at Selected Upcoming Fed Meeting Dates (CME FedWatch on 15 September 2017) | ||||||
---|---|---|---|---|---|---|
FOMC Meeting Date | 75-100 bps | 100-125 bps (Current) | 125-150 bps | 150-175 bps | 175-200 bps | 200-225 bps |
13-Dec-2017 (2017-Q4) | 0.0% | 22.1% | 76.4% | 1.5% | 0.0% | 0.0% |
12-Mar-2018 (2018-Q1) | 0.0% | 15.8% | 60.7% | 22.3% | 1.2% | 0.0% |
13-Jun-2018 (2018-Q2) | 0.0% | 10.3% | 45.0% | 35.1% | 8.9% | 0.6% |
26-Sep-2018 (2018-Q3) | 0.0% | 6.8% | 33.0% | 38.2% | 18.0% | 0.3% |
In this table, we see that Federal Funds Rate futures speculators are betting that the Fed's next rate hike will be announced at the Fed's 13 December 2017 meeting, increasing its target range from 100-125 basis points to 125-150 basis points, which would account for why investors would be focusing some attention on 2017-Q4.
Looking beyond that quarter however, we see that there is over a 56% probability that the Fed will increase its target range from 125-150 to 150-175 basis points (or higher) by the time of the FOMC's September 2018 meeting, which is why that future quarter would now be on the radar of relevance for stock market investors.
As we've seen over the last several weeks however, the probabilities for Fed rate hikes can be very volatile. To get inside the Fed's thinking and the factors that can influence its decisions, we identified the following headlines for their market-moving potential over the course of Week 4 of September 2017.
Monday, 25 September 2017
- Oil hits highest since July 2015; producers say market rebalancing
- Fed policymakers clash on outlook for inflation
- Wall St. declines on tech sellof, North Korea concern
Tuesday, 26 September 2017
- Oil falls from 26-month high on profit-taking, ahead of U.S. data
- Atlanta Fed's Bostic 'comfortable' with December hike if economy performs
- Fed's Yellen says gradual hikes should continue, despite weak inflation
- Wall St. ends flat after Yellen; tech shares bounce
Wednesday, 27 September 2017
- U.S. rate hike bets lift dollar, bond yields; stocks gain
- Exclusive: Republican U.S. tax framework sets 20 percent corporate rate
- Wall St. gains on financials boost, tax hopes
Thursday, 28 September 2017
- Oil slips one percent as extends pullback from 2015 peaks
- KC Fed's George says rate hike best way to ensure recovery is sustained
- Fed's Fischer says important that QE reversed
- S&P ekes out record on healthcare gains, tax plan hopes
Friday, 29 September 2017
- Bullish oil streak means strongest 3rd qtr Brent price gain in 13 years
- Fed's Harker says he still expects to raise rates in December
- Hurricanes will likely 'hit' U.S. GDP growth in third quarter: Trump
- S&P 500, Nasdaq hit records on tech lift
Elsewhere, Barry Ritholtz breaks down the positives and negatives for the U.S. economy and markets that were reported in the fourth and final week of September 2017.
Disclosure: None.
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