Unexpectedly Intriguing!
December 8, 2008

Just for fun, we thought we might graphically present the history of the S&P 500 going back to 1872, as measured by its trailing year compound annualized growth rate of the index' average monthly value:

S&P 500 Trailing Year CAGR of Average Monthly Index Value, January 1872 through November 2008

We see in this chart that by this measure, the year-over-year growth rate of stock prices are now at their third-lowest ever value at -40%, just behind March 1938's level of -43% and still well behind July 1932's compound annualized growth rate -65%.

Let's take a look next at how the compound annual growth rate of dividends per share has changed for the S&P 500 over the same period:

S&P 500 Trailing Year CAGR of Dividends per Share, January 1872 through November 2008

Here, when we incorporate the latest in dividend futures data, we find an apparent disconnect between the magnitude of the current stock price decline and the worst ever recorded annualized dividend growth rate. As of 8 December 2008, those futures would anticipate that growth rate bottoming out at -6% in September 2009. By contrast, the lowest dividend growth rates roughly coinciding with the worst stock price growth rates are -36%, recorded in December 1938, and -39%, recorded in December 1932.

Finally, we'll leave off with a chart showing our preferred measure of distress in the stock market over this same period, the price-dividend growth ratio, which is the ratio of the compound annualized growth rate of year-over-year average monthly stock prices with respect to the compound annualized growth rate of trailing year dividends per share:

Price-Dividend Growth Ratio, January 1872 to November 2008

We artificially cap the price-dividend growth ratio at an absolute value of 125. These peaks correspond to when the denominator of the ratio, the compound annualized growth rate of trailing year dividends per share, is equal to zero.

This chart confirms that a distress peak is continuing to build in the U.S. stock market. At present, utilizing dividend futures data, we anticipate the peak will occur in January 2009. Given that we have previously noted a correlation between distress peaks and market bottoms, and that the dividend futures data indicates a recovery in dividends per share in the third quarter of 2009, we would anticipate that a forward looking market will begin its recovery shortly after.

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