Following the U.S. stock market's reaction and recovery to the political fiasco in Italy last week (fiasco being Italian slang for "election"), we thought it might be fun to add just a little more information to our chart showing how the change in the growth rate of stock prices closely tracks the expected change in the growth rates of dividends per share at specific points of time in the future. So, for this edition of our chart, we're showing the daily change in the growth rate of stock prices (as the dotted blue line):
As you might expect, the daily stock price acceleration line is more volatile than the 20-day moving average stock price acceleration line, which tends to more closely track the change in the growth rate of dividends expected in future quarters.
In the dotted blue line, you can see the sudden dip created by the market's reaction to the noise event that is the Italian election fiasco, which really began on 20 February 2013 (free, but registration required for access to the FT article), but which really punctuated itself on Monday, 25 February 2013.
Playing "what if", we asked the question: "What if investors continue to focus on 2013-Q2 in setting today's stock prices and the change in the expected growth rate of dividends for that quarter stays constant with where it is today. How much would the value of the S&P 500 have to change on average per trading day to converge with that level by 21 March 2013 - the last day we have shown on our chart?"
We came up with an average increase of 2.75 points per trading day.
And so we continue to find that the rally in stock prices has some additional room to run before it runs out. At least, in the absence of additional noise events or a sudden shift in investor focus to a different quarter in the future, or the sudden announcement of a major change in the dividend policies of one or more of the S&P 500's heavy hitters.
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Closing values for previous trading day.
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