QVMS - The S&P 500 Turns Down After Fed's Last Rate Hike Of 2022
Summary
- After a week that saw it rise as high as 4,019.65, the S&P 500 ultimately dropped 2.8% from where it ended the previous week to close at 3,852.36 on Friday.
- After the Fed's expected half-point rate hike on 14 December 2022, news indicating developing weakness for the U.S. economy reshaped investors expectations of how the Fed will be changing interest rates in 2023.
- We would describe the level of the S&P 500 as consistent with investors splitting their attention between 2023-Q1 and 2023-Q3.
After a week that saw it rise as high as 4,019.65, the S&P 500 (Index: SPX ) ultimately dropped 2.8% from where it ended the previous week to close at 3,852.36 on Friday, 16 December 2022.
Here's the latest update to the dividend futures-based model 's alternative futures chart:
Before we go any further, let's recap a short bit of our analysis from last week , which will help explain what's going on in the updated portion of the alternative futures chart:
If investors focus predominantly on 2023-Q1, the trajectory of the S&P 500 will remain within the redzone forecast range. If investors shift a larger portion of their attention further forward in time to 2023-Q2, the trajectory will drop below this indicated range.
On Wednesday, 14 December 2022, the trajectory of the S&P 500 has risen to the middle portion of the red zone forecast range, corresponding with investors mostly focusing their forward-looking attention on 2023-Q1. But that focus was very short-lived, as investors quickly shifted their forward-looking attention beyond the first quarter of 2023.
Here's what changed to prompt that shift in how far forward investors are looking. After the Fed's expected half-point rate hike on 14 December 2022, news indicating developing weakness for the U.S. economy reshaped investors expectations of how the Fed will be changing interest rates in 2023. Those changes are captured by the CME Group's FedWatch Tool , which dialed back its forecast for the Fed's next rate hike from a half-point to just a quarter-point at its 1 February (2023-Q1) meeting. The FedWatch tool then sees just one more quarter-point rate hike in March (2023-Q1), where the Federal Funds Rate would top out in the 4.75-5.00% range, below what they expected just a week earlier. Looking further forward, developing expectations for a recession in 2023 have the FedWatch tool projecting two quarter-point rate cuts, the first in September (2023-Q3) and the second in December (2023-Q4).
Based on this information, through Friday, 16 December 2022, we would describe the level of the S&P 500 as consistent with investors splitting their attention between 2023-Q1 and 2023-Q3. That level is coincidentally near the middle of where we might sketch a new red zone forecast range on the chart to indicate where the S&P 500 would be if investors were closely focused on 2023-Q2.
Here are the week's market-moving headlines:
Monday, 12 December 2022
- Signs and portents for the U.S. economy:
- Investors don't have high opinion of Fed minions' abilities:
- Wall St climbs with inflation, Fed on deck
Tuesday, 13 December 2022
- Signs and portents for the U.S. economy:
- Fed seen slowing rate hikes, likely ending them below 5%
- Bigger stimulus developing in China:
- Wall St rises after CPI data, but Fed concerns persist
Wednesday, 14 December 2022
- Signs and portents for the U.S. economy:
- Fed raises rates by half percentage point, sees economy nearing stall speed
- Bigger trouble developing in Japan, Brazil:
- Smaller trouble developing in the Eurozone?
- Even bigger stimulus developing in China:
- Central bank rate hikes to continue through end of 2022:
- ECB minions say elevated inflation to stay in Eurozone for another three years:
- Wall Street ends lower after latest Fed rate hike
Thursday, 15 December 2022
- Signs and portents for the U.S. economy:
- Bigger trouble developing in China, Eurozone:
- BOJ minions say they can't stop, won't stop never-ending stimulus:
- Central bank minions signal more rate hikes are coming, start to signal rate hikes will slow, end in 2023:
- Bank of England raises rates to 3.5%, sees more hikes ahead
- Norway central bank hikes rate by quarter point, likely to act again
- Swiss National Bank says inflation battle not yet won
- Taiwan central bank signals end to rate hikes next year
- Bank of Mexico hikes rate to 10.50%, signals another increase coming
- ECB minions delivers half-point rate hike into developing Eurozone recession:
- Wall Street slumps as Fed heightens recession fears
Friday, 16 December 2022
- Signs and portents for the U.S. economy:
- Fed minions claim they won't start rate cuts until after 2023 recession is well underway:
- Bigger stimulus developing in China:
- Bigger trouble developing in Japan:
- BOJ minions thinking about ending never-ending stimulus:
- Bigger trouble in the Eurozone not as bad as expected:
- ECB minions say they won't stop fighting inflation, say their jawboning is just like a rate hike, say they won't have more big rate hikes:
- Wall Street's slump continues as recession fears mount
The Atlanta Fed's GDPNow tool 's projection for real GDP growth in the current quarter of 2022-Q4 dropped back to +2.8% from last week's +3.2% estimate. The "Blue Chip consensus" still projects over 1% real economic growth for the current quarter of 2022-Q4.
This is the last post in our S&P 500 chaos series for 2022. We'll be back in the first week of January 2023 to recap the final two trading weeks of 2022, where the big question we have going into those final weeks is whether there will be one or two more Lévy flight events to end the volatile year of trading.
For further details see:
The S&P 500 Turns Down After Fed's Last Rate Hike Of 2022