Unexpectedly Intriguing!
October 28, 2013

Thanks to the diminished level of noise in the stock market, stock prices continued to behave exactly as expected in the week ending Friday, 25 October 2013, with the S&P 500 rising by 15.27 points to close at at new all-time record high of 1759.77.

Here's what that looked like on our favorite chart, which tracks the change in the year-over-year growth rates of S&P 500 stock prices and their expected trailing year dividends per share:

Changes in the Growth Rates of Expected Future Trailing Year Dividends per Share with Daily and 20-Day Moving Average of S&P 500 Stock Prices, through 25 October 2013

In the chart, we see that the change in the year-over-year growth rate of daily stock prices for the S&P 500 is converging toward the level of expectations consistent with the change in the growth rate of dividends per share for 2014-Q1. In the relative absence of noise to affect stock prices, they should consistently be within a narrow range of that level until investors shift their forward-looking attention to a different point of time in the future. They are already very close to a level that would be consistent with "typical" levels of noise in the stock market.

Analyst Notes

If you compare this week's chart to our previous edition, you'll see that the levels for the trailing year dividends that incorporate the data for the recently closed 2013-Q3 have shifted from their previous positions. This is a result of our incorporating S&P's official data for 2013-Q3, which was $8.909 per share as of 30 September 2013, rather than the CBOE dividend future's final recorded figure from 23 September 2013 of $8.814 per share for the quarter. The difference between the two figures is likely attributable to that slight term mismatch and S&P's finalization of the weighting of the index' component dividends according to their market capitalization.

Beyond that, we also had a minor spreadsheet error for the newly added data for 2014-Q3, where we were erroneously measuring the change from 2013-Q2 instead of 2013-Q3 in calculating the expected growth rate of the trailing year dividend per share for the future quarter. That will teach us to just drag the calculation for the previous quarter out to the right in the spreadsheet when setting up the math for a new quarter for which we're first getting data!

With that error corrected, we see that except for the data for 2014-Q1, where investors have fortunately collectively focused their forward-looking attention, the data for all other quarters ending in the future are negative. That's especially true for 2013-Q4, which is a consequence of the Great Dividend Raid of 2012.

What that means is that stock prices would fall rather dramatically if investors were forced to shift their attention to other future quarters. The wild card would be for 2014-Q4, for which we don't expect to have data until around Christmastime.

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