S&P Declines As Instant Recession Arrives For U.S. Economy

The response to the coronavirus pandemic in the U.S. sank the S&P 500 on Friday, March 20, 2020, where after having been flat for most the day, the deteriorating outlook for the U.S. economy was aided by New York Governor Andrew Cuomo’s order to close non-essential businesses and for New York residents to stay at home, rattling traders and investors. The S&P 500 went on to close the day at 2,304.92.

The action is significant because with California having ordered its residents to stay at home on Thursday evening, the statewide economy shutdowns will effectively swing the U.S. economy instantly into recession.

The outlook for S&P 500 dividends continued to deteriorate, with the future quarters of 2020-Q2 through 2021-Q1 seeing declines in expected payouts. With the closing of the futures contract period for 2020-Q1, that quarter saw a boost, but that’s looking backwards, not forwards. The following chart shows where the expectations for S&P 500 quarterly dividends stands as of the close of trading on Friday, March 20, 2020.

If you’ve seen last week’s edition of our S&P 500 chaos series, but without the daily updates, please note we were forced to change the vertical scale of the chart to accommodate the deterioration in expectations for dividends.

We were also forced to reset the vertical scale of the alternative futures chart. Here’s the chart as updated through the close of trading on Friday, March 20, 2020:

The actual trajectory of the S&P 500 is consistent with investors focusing on 2020-Q2 in setting stock prices, which is nearly a best-case scenario given how much dividend futures have fallen.

As for why that’s happening, here’s the more significant headlines we flagged throughout the entire past week. There’s been quite a lot of significant news:

Monday, March 16, 2020

  • Global economic turmoil from coronavirus pandemic:
  • Bigger stimulus developing all over:
  • Industry and borrower relief on the table:
  • Fallout from Fed minions fixing wrong problem:
  • Wall Street sinks as Fed’s shock cut increases worries over virus spread
    • See above. The Fed’s shock cut didn’t “increase worries”, so much as it didn’t adequately address them. The weak actions open the question of whether the Fed’s minions understand the true nature of what’s been behind the economy’s developing liquidity shortage.

Tuesday, March 17, 2020

Wednesday, March 18, 2020

  • Coronavirus quarantines hitting economy:
  • Bigger stimulus developing everywhere
  • Previous stimulus measures failing to stem rush for cash:
  • Fed, national central bank minions weighing additional, new actions:
  • Rush for Cash Rattles Markets, Driving Stocks Lower

Thursday, March 19, 2020

Friday, March 20, 2020

These are the headlines that stood out to us for their market-moving potential. Elsewhere, Barry Ritholtz rounds up the positives and negatives he found to be notable in the past week’s economics and market-related news.

Fed Delivers Needed Relief, Democrats Block Fiscal Relief

Update March 23, 2020, 5:30 PM Eastern: Two big things happened today, one positive for the market, the other negative – and the negative won out, as the S&P 500 dropped another 2.93% to close at 2,237.40.

The positive event was the Fed’s announcement on Sunday, March 22, 2020, that it would enter uncharted territory in supplying liquidity to corporations, where there has been the equivalent of a run on the proverbial bank, particularly by firms seeking to secure cash to stay afloat in a world impacted by government-ordered coronavirus economic shutdowns.

The negative event was the U.S. Democrat party leadership’s decision to play games and use emergency legislation to cram through their nakedly partisan agenda, adding new demands at the last minute and derailing a $1 trillion relief bill for U.S. businesses that had up to that point had been put together with strong bipartisan support.

All this had happened before the market opened on Monday. Gotta give credit to ZeroHedge’s impromptu event analysis:

Dividend futures for 2020-Q2 dropped from the $13.75 that was recorded last Friday to $12.40 on Monday, with other future quarters seeing relatively little to no changes. The S&P 500’s drop on the day seemed to be more consistent with investors focusing on 2020-Q3 in making their current-day investment decisions, as suggested by the alternative futures spaghetti forecast chart.

For the S&P 500 dividend futures chart, we’re now showing historical data for 2019-Q2 through 2020-Q1, whose dividend futures contract expired as part of the market’s quad-witching day on Friday, March 20, 2020, and the future projections for 2020-Q2 through 2021-Q2, where the futures data for 2021-Q2 has just become available from the CME Group.

Speaking of which, it appears they are closer to having the CME Group FedWatch Tool back in service. We think they still need to sort out how they’ll adapt it to handle potential negative rates, but for now, it indicates that the Federal Funds Rate won’t be rising above the 0-0.25% range anytime in the tool’s foreseeable future.

Access to Cash, Positive Speculation Boost Stock Prices

Update March 24, 2020, 6:00 PM Eastern: The biggest positive news on the day was the Fed’s and the ECB’s actions to alleviate the major shortage of U.S. dollars that has developed in the world economy.

Investors were also optimistic regarding a now $2 trillion relief bill that congressional leaders and the Trump administration claim is close at hand, but nothing passed out the Congress before the closing bell for the day.

Still, even without that relief bill moving forward, it’s impressive to see the power of large buckets of money to generate a phenomenal level of upward speculation in stock prices, which gave the Dow Jones Industrial average its strongest one-day performance since 1933. For the S&P 500, we can see the effect of the speculative boost in its rising above all of the potential trajectories associated with the expectations for dividends in each upcoming future quarter we’re currently tracking in the alternative futures chart:

And speculation it is for now, because though the outlooks for expected future dividends in 2020-Q2 and 2020-Q4 both rebounded on Monday, as shown in the update to the dividend futures chart, they are still well below where the S&P 500 is.

Two things can happen. First, in the best-case scenario, the expectations for future dividends continue to rise, providing support for the level of the S&P 500. To the extent that outcome simply relies on companies not cutting dividends as much as investors had come to expect, it may even be likely – that’s why we’ve made such a big deal out of the Fed’s support in supplying much-needed cash liquidity to corporations starving for it, and why we indicated the Fed and other central bank actions to supply it was needed to put a floor under stock prices.

The second thing that can happen is that the level of expected future dividends doesn’t recover to what it had been, which would put the S&P 500 at risk of experiencing a Wile E. Coyote moment as soon as investors look down and realize that support isn’t there.

Which scenario will play out is what makes watching the S&P 500 so interesting!

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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