Unexpectedly Intriguing!
March 11, 2013

Did you know that we're in the final week of the first quarter of 2013?

It's true, at least where the dividend futures contract for 2013-Q1 is concerned. That contract is set to expire on 15 March 2013, which for us marks the day that a new dividend futures contract, for 2014-Q1 should come into existence shortly thereafter, which will allow us to see an extra three months further into the future!

And here you thought the first quarter of 2013 would really end on 31 March 2013! (For reference, futures contracts typically expire on the third Friday of the month ending the quarter in question, which just happens to be super early this quarter considering how the days fell this month.)

Until then, not much in our outlook has changed, as the market is continuing to behave pretty much as we've expected:

Change in Growth Rates of Expected Future Trailing Year Dividends per Share and 20-Day Moving Average of S&P 500 Stock Prices - 11 March 2013

As you can see in our chart, the expiration of the futures contract for 2012-Q4 on 20 December 2012 marked the timing of the most recent shift in investor focus. In that case, investors shifted their focus to the more distant future quarter of 2013-Q2, when they had been much more atypically and nearsightedly focused on the then current fourth quarter of 2012.

It will be interesting to see which alternate future path stock prices might take. If they stick with 2013-Q2, the current rally will start to stall out. If they focus on 2013-Q3, stock prices will fall around 20% on average from their present level. If they focus on 2013-Q4, then the dive will be deeper, with stock prices plunging around 50% on average from their current level.

The new wild card is the expected future for 2014-Q1, which we won't see until next week at the earliest.

As for the old wild card, we had an interesting thought - what if investors are really focused on 2013-Q3 right now and the only reason stock prices are this elevated is because of the Fed's latest quantitative easing program?

In that case, we would expect to see a lot more volatility in stock prices given the artificial nature of that kind of support. And while we've seen some volatility in very recent weeks, until the Italian election fiasco, the market was mostly characterized by a lack of it.

Instead, what we've seen is more consistent with investors focusing on the expected dividends to be paid out in 2013-Q2 in setting stock prices, with the kind of volatility that we associate with the market's typical level of noise. In fact, aside from the market's reaction to the Italian election fiasco and the tax avoidance-inspired activity announced in recent weeks as an outcome of the fiscal cliff tax deal back on 3 January 2013, it's been a pretty boring quarter.

Which as investors, is something we appreciate!

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