Second Lévy Flight Event Boosts S&P 500 After Election

Posted: Nov 09, 2020 12:38 PM
Second Lévy Flight Event Boosts S&P 500 After Election

Source: AP Photo/Richard Drew, File

Time for a flashback! On 28 October 2020, we provided the following update to that week's entry in our ongoing S&P 500 chaos series

The S&P 500 dropped 3.5% today, with the die cast long before the market opened thanks to France's and Germany's decision to impose new nationwide COVID lockdowns, which will negatively impact the European and global economy. From our perspective, that news appears to have triggered investors to suddenly shift their forward-looking focus from 2020-Q4 toward 2021-Q1 in a new Lévy flight. The change comes just as we're reaching the end of the redzone forecast range: 

To see the chart, click here.

This new shift is consistent with our nearly one month old observation that investors "may switch their focus back and forth between 2020-Q4 and 2021-Q1 severval times before the end of the 2020 calendar year". It's important to note that while we can anticipate the effect and the relative magnitude of the shifts when they do occur, they are not predictable because the timing of these shifts is essentially random. That is because they are prompted by the random onset of new market-moving information, like today's before-the-bell news of the Eurozone's new coronavirus lockdowns. At the same time, what makes the content of the news that drives these events so important is how it affects the time horizon for investors, or rather, how far forward in time they are looking when making their current day investing decisions.

What events might refocus investors back upon 2020-Q4? That answer may come sooner than you might think, but once again, it all hinges on the random onset of new information.

The event that refocused investors back on 2020-Q4 was the U.S. election. On 5 November 2020, we added the following update to our previous entry in this series:

It's taken just two days for investors to fully shift their focus from 2021-Q1 back into 2020-Q4 in the aftermath of the 3 November 2020 election, thanks largely to the failure of the Democratic party to deliver a 'blue wave' election result that would ensure their promised tax hikes on corporate and investor income. Here's the updated alternative futures chart showing the shift in the level of the S&P 500 corresponding to that change in the future time horizon for investors:

To see the chart, click here.

With the second Lévy flight of the last two weeks now complete, investors didn't have much reason to shift any part of their attention to any other point of time in the future, nor was there any meaningful change in the expectations for future dividends. So the S&P 500's post-election rally stalled out on Friday, 6 November 2020. Here's one last update to the alternative futures chart to close out the week that was.

To see the chart, click here.

Other than that, the growing spread of COVID-19 infections was truly the biggest story in the world in the last week. Here are the headlines we plucked out of the week's newstream for their market moving potential.

Monday, 2 November 2020
Tuesday, 3 November 2020
Wednesday, 4 November 2020
Thursday, 5 November 2020
Friday, 6 November 2020

Need more summarized news? Barry Ritholtz lists all the positives and negatives he found in the past week's economics and markets news, where the #1 negative is a sentiment shared by most Americans!

Here's hoping we can take a break from midweek updates! If events are such we cannot, please click here to catch up with the latest in this series!

Update 9 November 2020, 7:17 AM EST: Apparently, 2020 isn't over yet. Before the bell rang to open today's trading, we find this headline: US Futures Are Soaring, JPM Says 'Nasdaq Whale' Is Back. What we don't yet know if it is SoftBank returning to its gamma-producing trading tricks or if a different options player has started following SoftBank's old playbook. Regardless of who is following it, as we've seen before, the so-called 'Nasdaq whale' adds a lot of non-sustainable speculative noise to the market, with stock prices falling whenever the activity stops.

More practically, we can capture the contribution of the speculative noise through adjusting the amplification factor in the dividend futures-based model we use to project the potential futures for the S&P 500, where we only need to see how much noise they've added. That will take several days of observations to quantify, where while it persists, the model's unadjusted projections will give an indication of where the floor for the market is while it is being boosted by the speculative noise.

In the meantime, we can strike out the possibility of a fundamental change in expectations for dividends in 2020-Q4 causing the rise in stock prices with the data available through the last week. The failure of a 'blue wave' to materialize in the U.S. election results has taken the potential for large corporate and investment income tax hikes off the table, so there will not be a repeat of 2012's Great Dividend Raid to provide a fundamental footing for the change in stock prices that seem to be in the offing before the U.S. stock market opens this week.

But let's also not rule out the potential for the random onset of positive news that could legitimately boost stock prices across more than just Big Tech stocks: Pfizer COVID-19 Vaccine More Than 90% Effective. That's still speculation at this time, but the kind that can boost the expectations for future dividends. Stay tuned!...