The S&P500 Has Reached New Levels Of Volatility

Political Calculations

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Posted: Mar 09, 2020 11:58 AM

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As expected, the S&P 500 (Index: SPX) continues to experience an impressive amount of volatility on a day-to-day basis.

Since we’ve been appending updated bits of analysis to our previous S&P 500 chaos posting during each day of the past week, we’re going to focus this new edition on what happened on Friday, 6 March 2020, after we animate all the moves that took place since the close of trading on Friday, 28 February 2020 and quickly summarize the week that was. Please click through to our site to access the animation.

Each of the large swings in stock prices during the previous week coincided with major swings in how far into the future investors were focusing their attention, as changing expectations for the size and timing of interest rate cuts by the U.S. Federal Reserve led investors to alter their forward-looking focus back and forth between 2020-Q2 and 2020-Q4 from Friday, 28 February 2020 through Thursday, 5 March 2020. This animated chart captures those changes during the week ending on Friday, 6 March 2020, where the thing we want to point out is how little changed those expectations were between Thursday, 5 March 2020 and Friday, 6 March 2020.

On Friday, 6 March 2020, the dividend futures-based model indicated that investors shifted their attention more toward 2020-Q2, but unlike the previous days in the week, that change was unaccompanied by a change in the probabilities of the size and timing of how the Fed will change the Federal Funds Rate.

The big thing that changed on Friday, 6 March 2020 were the expectations for future dividends, which saw declines in the amount of cash dividends projected to be paid in upcoming future quarters from 2020-Q2 through 2020-Q4. In the following chart, we’ve animated the daily closing values indicated by the CME Group’s futures for S&P 500 quarterly dividends for the future quarters of 2020-Q1 (which may still be in some flux until the dividend futures contracts for the quarter expire on the third Friday of March) through 2020-Q4, for each trading day from Friday, 28 February 2020 through Friday, 6 March 2020. You can view the chart here.

From Friday, 28 February 2020 through Thursday, 5 March 2020, the day-to-day changes in the S&P 500’s expected future quarterly dividends is largely consistent with day-to-day noise in these futures. On Friday, 6 March 2020, we see significant decreases in the amount of dividends expected to be paid out in the future quarters of 2020-Q2 through 2020-Q4, which adds a new, downward force to affect stock prices.

This so far speculative change will work to concentrate investor focus on 2020-Q2, since this will be the period in which companies affected by the developing global economic situation resulting from China’s coronavirus breakout will begin announcing changes in their business outlooks and their future dividend payouts.

Regardless, the S&P 500 has now entered into a new phase of its current period of volatility, where changes in expected future dividends, the fundamental driver of stock prices, will affect changes in stock prices.

Speaking of which, here is a more comprehensive listing of the past week’s market-moving headlines than what we’ve previously presented in our daily appendices:

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

Barry Ritholtz listed the positives and negatives he found in the past week’s economics and market-related news.

As the market’s volatility remains elevated, we’ll append daily updates to the original version of this article. Meanwhile, previous posts in our S&P 500 chaos series are also available.

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