Unexpectedly Intriguing!
October 27, 2015

Today, we're going to tell a big story with just two charts. Here's the first, which updates the chart we last featured on 15 October 2015.

Alternative Futures for S&P 500 - 2015Q4 - Rebaselined Model - Snapshot on 2015-10-26

In case you are wondering what we mean by "QE Promise" in the chart above, we're hearing that the European Central Bank is looking to extend its current Quantitative Easing program, where it is currently buying 60 billion Euros worth of bonds each month, by another six months. Oh, and is also considering expanding it by another 10-20 billion Euros per month.

But that's not the big question that needs to be answered, because in our second chart, in which we get under the hood of the S&P 500 with some old school analysis, spanning 2015 to date, we show why what we showed in the first chart is such a concern....

Change 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 - Snapshot on 2015-10-26

Here's the problem. The ECB launched their current 60 billion Euro per month QE program back in March 2015, having virtually no effect on U.S. stock prices, which behaved exactly as our theory says they should, with the change in the rate of growth (acceleration) of stock prices being directly proportionate to the change in the rate of growth (acceleration) of expected future trailing year dividends per share at the point of time in the future where investors have focused their forward-looking attention.

But now, in the days since the market reacted to the ECB's announcement that it is considering extending and potentially expanding its QE program, U.S. stock prices have risen well above the levels we would expect to see them at if they were purely being driven by the market's underlying fundamentals.

That suggests that speculation, more than any other factor, is what has driven stock prices to their currently elevated levels, where investors in the U.S. market are betting in favor of one or more of the following possibilities:

  • The amount of dividends per share that the market will pay in the future will be much higher than currently expected levels, for which we have data looking forward through 2016-Q3 that says that we should only look for single digit growth, at best.
  • The U.S. Federal Reserve will not only not hike short term interest rates, it will add Oprah Winfrey to its board, who is going to launch her own new round of quantitative easing, and it will be glorious ("And you get a billion, and you get a billion, and you get a billion!...").
  • The multiplier in the fundamental relationship between stock prices and their underlying dividends per share, instead of being nearly constant as it has been over the past several years, has suddenly, unexpectedly and inexplicably changed, from +5 to something on the order of -50.

In short, we think it's a noise event. The good news it that is would appear to be one that is actually providing a positive benefit in that it has shifted the likely future trajectory of stock prices to be higher than what we were projecting a month ago.

The bad news is that it's a noise event. All noise events end - it's only ever a question of when.

Labels: ,

About Political Calculations



blog advertising
is good for you

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations.com

Thanks in advance!

Recent Posts

Applications

This year, we'll be experimenting with a number of apps to bring more of a current events focus to Political Calculations - we're test driving the app(s) below!

Most Popular Posts
Quick Index

Site Data

This site is primarily powered by:

This page is powered by Blogger. Isn't yours?

Visitors since December 6, 2004:

CSS Validation

Valid CSS!

RSS Site Feed

AddThis Feed Button

JavaScript

The tools on this site are built using JavaScript. If you would like to learn more, one of the best free resources on the web is available at W3Schools.com.

Other Cool Resources

Blog Roll

Market Links
Charities We Support
Recommended Reading
Recommended Viewing
Recently Shopped

Seeking Alpha Certified

Archives
Legal Disclaimer

Materials on this website are published by Political Calculations to provide visitors with free information and insights regarding the incentives created by the laws and policies described. However, this website is not designed for the purpose of providing legal, medical or financial advice to individuals. Visitors should not rely upon information on this website as a substitute for personal legal, medical or financial advice. While we make every effort to provide accurate website information, laws can change and inaccuracies happen despite our best efforts. If you have an individual problem, you should seek advice from a licensed professional in your state, i.e., by a competent authority with specialized knowledge who can apply it to the particular circumstances of your case.