The S&P 500's Roller Coaster Ride

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Posted: Mar 16, 2020 11:52 AM
The S&P 500's Roller Coaster Ride

Source: AP Photo/Richard Drew, File

You can't say you weren't warned. The erosion of expected future dividends through the projected future of 2020 has begun contributing to the increasing volatile roller coaster ride S&P 500 investors have found themselves on.

Although we've been attaching daily updates of the market's actions to our regular weekly S&P 500 chaos series' posts, we thought it might be a good time to fully review the S&P 500's latest Lévy flight event, which took place between 24 February and 9 March 2020, as investors fully shifted their forward-looking attention from 2020-Q4 inward to 2020-Q2. The following animation shows all the market's action over the last three weeks from Friday, 21 February 2020 through Friday, 13 March 2020.

The Lévy flight event is really associated with changes in the expected timing of rate cuts by the Federal Reserve, where investors went from expecting two quarter point rate cuts in 2020, one in 2020-Q3 and another in 2020-Q4, to where as of last Friday, they are expecting the Fed to slash interest rates on or by the conclusion of the Federal Open Market Committee's 18 March 2020 meeting to the zero bound, which is to say to a target range between 0% and 0.25%.

In between, there was an emergency rate cut of a half point on Tuesday, 3 March 2020, and as of yesterday, Sunday, 15 March 2020, the Fed has executed another emergency rate cut, this time to the zero bound.

Since that expectation had locked in as of Wednesday, 11 March 2020, which brings us to what happened on Thursday, 12 March 2020, when the bottom seemed to drop out of the S&P 500. This is where the erosion of future expected dividends caught up to the level of the S&P 500, causing it to prematurely plunge by nearly 10%, which is to say it moved to the level it descended earlier than the dividend futures-based model anticipated.

We think that's a contributing factor to why the S&P 500 rebounded so strongly on Friday, 13 March 2020 when President Trump announced the government would be turning to the private sector of the U.S. economy for assistance in combating the coronavirus pandemic.

And that's pretty much what happened during the crazy week that was for the S&P 500. Since the Fed has already acted to slash the Federal Funds Rate to the zero bound range, we'll dispense with updating our snapshots of the CME Group's FedWatch tool's indicated probabilities of expected changes in that interest rate, and instead animate how investor expectations for future S&P 500 dividends has changed over the last three weeks, matching the period covered in our animation of the S&P 500's roller coaster ride.

We'll also provide a more complete listing of previous week's market-moving news headlines than what we have in our daily updates:

Monday, 9 March 2020
Tuesday, 10 March 2020
Wednesday, 11 March 2020
Thursday, 12 March 2020
Friday, 13 March 2020

Over at the Big Picture, Barry Ritholtz listed the positives and negatives he found in the past week's economics and market-related news.

While the S&P 500's volatility remains elevated, we'll attach daily updates of the market's main actions after the end of each trading day until it somewhat settles down. If you're accessing this article on a site the republishes our RSS news feed, you can get the latest updates by clicking through to the original article on our site. The best time to check will be late in the evenings, but since we don't follow a set schedule in posting updates, you might more reliably find our updates early the next morning.