QVML - The S&P 500's Market Regime Reestablishes Itself
2023-11-07 02:55:00 ET
Summary
- It was just a week ago that we were looking at the serious prospect of a change in market regime for the S&P 500.
- Last week's developments came as the Federal Reserve, which has strong control over short-term interest rates, chose to leave them alone.
- Starting from May 1, investors expect deteriorating economic conditions will force the Fed to start a series of quarter-point rate cuts at six- to twelve-week intervals through the end of 2024.
It was just a week ago that we were looking at the serious prospect of a change in market regime for the S&P 500 (SPX). But now, we have strong evidence the market regime that's been in place since March 9, 2023, has reestablished itself. Because it has, the index rose 5.85% over the past week, closing out Friday, November 3, 2023, at 4358.34 .
That increase points to a significant role for the U.S. Treasury yield curve in determining the market regime for the U.S. stock market. Last week's developments came as the Federal Reserve, which has strong control over short-term interest rates, chose to leave them alone. The Fed however has little control over long-term interest rates, which are set by the market.
Up through October 19, 2023, those rates had been headed higher and were moving toward "reverting", which is to say that long-term rates were increasing to where they would soon rise higher than the short-term rates controlled by the Fed. Since October 19, 2023, however, longer-term rates have fallen, with the U.S. Treasury yield curve becoming more inverted again as a result.
These changes affect publicly traded companies that borrow to support their long-term growth plans. Rising long-term rates would mean higher costs to borrow over the lifespan of their investments in their businesses, but falling long-term rates mean they will have lower costs. The first scenario was accompanied by falling stock prices, while the second has been accompanied by rising stock prices. These companies have better prospects for investors in the second scenario.
Stock prices have risen enough in response to the shifting of the long-term portion of the U.S. Treasury yield curve that the recent decline now looks fully like an outlier event with respect to the red-zone forecast range in the latest update for the alternative futures chart.
The past several weeks have provided the basis of a natural experiment, one that's given us the best look we've ever had at what can cause a change in market regime. Right now, with no change in market regime, the multiplier for the dividend futures-based model looks like it will continue unchanged with m = +1.5.
Meanwhile, for additional context behind what may be influencing the direction of the longer-term portion of the yield curve, here is our summary of the other market-moving events of the week that was.
Monday, October 30, 2023
- Signs and portents for the U.S. economy:
- Bigger trouble, signs stimulus getting traction developing in China:
- Mixed economic signs developing in the Eurozone:
- ECB officials don't want people thinking they might cut rates during next eight months, want Eurozone banks to stop doing business with Russia:
- Nasdaq, S&P, and Dow add +1% each as markets bounce back from correction territory
Tuesday, October 31, 2023
- Signs and portents for the U.S. economy:
- Fed officials wondering what to do with balance sheet:
- Bigger trouble developing in China:
- Bigger trouble developing in Canada:
- BOJ officials try to keep never-ending stimulus alive as inflation runs higher, get ready to prop up yen with Japan Gov officials:
- ECB officials getting results they wanted from rate hikes:
- S&P 500 notches three-month losing streak for first time since Q1 2020
Wednesday, November 1, 2023
- Signs and portents for the U.S. economy:
- Fed officials expected to sit on hands, then does:
- BOJ, Japan Gov officials prop up yen, BOJ officials may be forced to end never-ending stimulus sooner:
- ECB officials worried about losing money:
- Nasdaq, S&P, Dow end higher while yields extend drop after Fed stands pat on rates
Thursday, November 2, 2023
- Signs and portents for the U.S. economy:
- Fed officials non-action reverse rising interest rates on Treasuries:
- Central banks hold interest rates steady, some start cutting rates:
- Bigger trouble developing in Japan:
- BOJ officials thinking about ending never-ending stimulus next year, may be falling being on fighting inflation:
- Bigger trouble developing in the Eurozone:
- ECB officials say all is good in the Eurozone:
- Wall Street indexes rally on bets of peak US interest rates, strong earnings
Friday, November 3, 2023
- Signs and portents for the U.S. economy:
- Fed officials excited to do nothing after worst-than-expected jobs report, admit they don't get the Treasury yield curve:
- Bigger trouble developing in the Eurozone:
- S&P 500 posts best week of 2023, caps stunning reversal from correction territory
The CME Group's FedWatch Tool 's projections have changed in the past week. It now anticipates the Fed will only hold the Federal Funds Rate steady in a target range of 5.25-5.50% through April (2024-Q2). Starting from May 1 (2024-Q2), investors expect deteriorating economic conditions will force the Fed to start a series of quarter-point rate cuts at six- to twelve-week intervals through the end of 2024.
The Atlanta Fed's GDPNow tool 's estimate of real GDP growth for the current quarter of 2023-Q4 is +1.2%, dropping from the +2.3% annualized growth it projected last week.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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The S&P 500's Market Regime Reestablishes Itself