Unexpectedly Intriguing!
February 25, 2014

It's time once again to take a snapshot of the major trends in S&P 500 stock prices against their trailing year dividends per share over time! Our first chart shows each of the major trends that have existed in the U.S. stock market since December 1991, all the way through to 21 February 2014:

S&P 500 Average Monthly Index Value vs Trailing Year Dividends per Share, December 1991 through February 2014, as of 21 February 2014

Our next chart zooms in on the current trend, which has been in place since 4 August 2011, and has extended through 21 February 2014 (the chart picks up the action from the end of 2011-Q1 on 30 June 2011):

S&P 500 Index Value vs Trailing Year Dividends per Share, 30 June 2011 Through 21 February 2014

The difference between the regression equations representing the main trajectory of stock prices with respect to deviations in both charts is attributable to the differences in the data presented in each. The first chart shows the average of the S&P 500's daily closing prices during each calendar month, while the second chart shows the S&P 500's daily closing prices.

Since 4 August 2011, the S&P has behaved in what we would describe as an orderly manner, where the residual variation in stock prices about their central trajectory would appear to be adhering to a normal distribution, where stock prices would be likely to fall between the indicated +/- one standard deviation curves some 68.4% of the time, between the +/- two standard deviation curves some 95% of the time, and between the +/- three standard deviation curves some 99.7% of the time.

While this is a characteristic of periods of relative order in the market, our readers should note that over the long term, stock prices are not normal. Since the statistical hypothesis that stock prices are behaving normally during relative periods of order in the market cannot be ruled however, we can use the tools of standard statistical analysis to gain more insight into their behavior during these periods.

One interesting and new observation we can offer is that the size of the standard deviation for the residual variation of stock prices about the main trend with respect to their dividends per share would appear to coincide with differences between the change of the year-over-year growth rates of dividends per share expected in different future quarters.

Which is something that should perhaps be expected if investors do indeed periodically shift their forward-looking focus from one future quarter to another in setting today's stock prices, since it would account for a good portion of the variation we observe in stock prices during relative periods of order in the market.

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