Political Calculations
Unexpectedly Intriguing!
June 19, 2019

There are two main sources we draw upon for peering into the future for dividends in the S&P 500 (Index: SPX). The first of these is a relative newcomer, the CME Group's S&P 500 Quarterly Dividend Index Futures Quotes, which indicates the projected amount of dividends expected to be paid out to investors from the current quarter out to the same quarter a year from now.

The second source we use is IndexArb's Dividend Analysis, which we've been tracking regularly since early 2009, although it has been around for much longer.

Both these sources are linked to dividend futures contracts, which for a given quarter, indicates the amount of dividends per share that will be paid out from the expiration of the dividend futures contract on the third Friday of the month ending the preceding quarter through the third Friday of the month ending the indicated quarter. By contrast, when Standard and Poor reports the dividends paid out to shareholders for its S&P 500 index for a given quarter, it reports the total amount paid out "per share" for the index for an entire calendar quarter.

That said, we're seeing some differences between the CME Group and Index for S&P 500 dividend futures, particular for the fourth quarter of 2019. The following chart shows what these sources are telling us to expect for dividends in each quarter of 2019, as of the dividend futures available on 18 June 2019:

Conflicting Quarterly Dividend Futures for the S&P 500 in 2019, Snapshot on 18 June 2019

It may not look like it from the 84-cents per share difference between the two figures, but when projecting the future for the S&P 500, the difference in expectations between these two sources would be magnified into a 200 point difference in the projected value of the S&P 500 should investors come to focus upon 2019-Q4 in setting current day stock prices, compared to what we presented earlier this week, all because our alternative futures chart reflects only the CME Group's futures data.

One or both of these two projections for 2019-Q4's dividends per share is wrong. Which do you suppose is more wrong?

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June 18, 2019

Just after the midpoint of 2019-Q2, we featured a chart showing that the number of dividend cuts that had been announced to date during the quarter was running well ahead of what had been recorded back in 2018-Q2 and was very nearly at levels that would indicate recessionary conditions were affecting parts of the U.S. economy.

It's almost a month later and, as you can see in the following chart showing the cumulative number of dividend cuts we've been able to sample during the quarter through Friday, 14 June 2019, the U.S. economy would appear to be catching some of its breath in the second half of 2019-Q2, where the pace of dividend cuts being announced has slowed considerably.

Cumulative Dividend Cuts Announced in U.S. by Day of Quarter, 2018Q2 vs 2019Q2 Year to Date, Snapshot 14 June 2019

Here are the five firms we've added to our sampling of 2019-Q2's dividend cuts, all of which set their dividends independently of their revenues, earnings, or cash flow, even though three of the firms are Real Estate Investment Trusts (or REITs):

The biggest change from earlier in the quarter has been the absence of oil and gas royalty trusts, where falling oil prices during the fourth quarter of 2018 led to dividends being cut during the first one-and-a-half quarters of 2019. Unfortunately, even though the price of West Texas Intermediate crude oil rebounded after its 2018-Q4 decline during 2019-Q1, those prices peaked and began falling again in late April 2019. Assuming a similar lag, we anticipate we'll see more dividend cuts from this sector of the U.S. economy from its distressed business environment in the upcoming months of 2019-Q3.

The other change we've seen during 2019-Q2 is an increase over 2019-Q1 for the number of financial firms and Real Estate Investment Trusts that have announced dividend cuts, which itself is a lagging outcome of the Federal Reserve's rising interest rates during 2018, whose effective level peaked in 2019-Q1. Since then, U.S. interest rates have begun to fall, dramatically in the case of mortgage rates, but short term rates remain elevated as firms that are sensitive to rate hikes are still shaking off the damage, which is why we're seeing this sector show up in the count of dividend cuts in higher numbers.

Overall, the pace of dividend cuts during 2019-Q2 through this point of time is on par with what we saw during 2019-Q1, where both quarters are well elevated over the same quarters in 2018. We'll wrap up 2019-Q2 in early July.

Until then, one important factor to realize is that while we focus on the U.S. in our analysis, the full scale of the story is much bigger.


Seeking Alpha Market Currents. Filtered for Dividends. [Online Database]. Accessed 14 June 2019.

Wall Street Journal. Dividend Declarations. [Online Database]. Accessed 14 June 2019.


June 17, 2019

After several weeks of volatility, the S&P 500 (Index: SPX) settled down during the second week of June 2019, as might be expected for when investors are focusing their forward-looking attention on the distant future quarter of 2020-Q1.

Alternative Futures - S&P 500 - 2019Q2 - Standard Model - Snapshot on 14 Jun 2019

The reason they're doing that is because they are currently betting on the Fed cut U.S. interest rates three times between now and the end of that quarter: a quarter point cut coming soon in 2019-Q3, possibly as early as July, with at least one an possibly another two quarter point rate cuts by the end of 2019-Q4. The following snapshot from the CME Group's FedWatch Tool reveals these current expectations:

CME Group FedWatch Tool - Probabilities of Changes in Federal Funds Rate Expected at Upcoming FOMC Meeting Dates - Snapshot on 14 Jun 2019

At this time, we think stock market investors are betting that third quarter point rate cut would more realistically happen in 2020-Q1 - if they anticipated that it was on tap for 2019-Q4, we would see stock prices decline sharply from their current level, similar to what happened in May 2019.

Speaking of which, if you've been following our S&P 500 chaos series over the past several weeks, you'll be very familiar with all the shifts in how far investors are looking into the future that have driven the recent volatility in stock prices.

We're just happy that it was a much quieter week with Fed officials having entered their communication blackout period ahead of the Federal Open Market Committee's upcoming two-day meeting on 18-19 June 2019 - the quiet before the storm for investors, so to speak, where investors kept their focus on 2020-Q1 because there wasn't any news to prompt them to shift their attention toward a different point of time in the future to continue driving more volatility into stock prices. Here are the headlines we picked out from the flow of news during the last week.

Monday, 10 June 2019
Tuesday, 11 June 2019
Wednesday, 12 June 2019
Thursday, 13 June 2019
Friday, 14 June 2019

But wait, there's more! Barry Ritholtz counted 6 positives and 6 negatives in his review of the week's major economic and market-related news.

Otherwise, sharp eyed readers will recognize that we've added some additional vertical bands to the right hand side of the S&P 500 alternative futures "spaghetti" forecast chart above, when compared to previous versions. Because the dividend futures-based model behind this chart uses historic stock prices from 13 months, 12 months and 1 month earlier as the base reference points from which it makes its projections into the future, these vertical bands indicate the periods where the echo of past volatility in stock prices will affect the accuracy of its projections of the future. This is a direct consequence of the volatility the S&P 500 began to experience during May 2019, where the upcoming echo will lead our model's projections to undershoot the likely trajectory of the S&P 500, assuming investors remain focused on 2020-Q1.

With investors shifting their attention backwards and forwards in time frequently during the last month however, who knows how long that assumption might hold?

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June 14, 2019

Warren Buffett is a legendary investor, one of the few who has consistent beaten the odds by beating the S&P 500 (Index: SPX), which has earned him the nickname "The Oracle of Omaha".

Buffett has attained that status by investing the resources of his company, Berkshire Hathaway (NYSE: BRK.A) in other companies, either buying their shares, as in the case of companies like Coca-Cola (NYSE: KO) and JPMorgan Chase (NYSE: WFC), or buying entire private companies, including household names such as See's Candy and Geico.

If you go back over 30 years, you can see that the cumulative value of Buffett's investments, as measured by Berkshire Hathaway's stock, has outperformed the S&P 500. Brian Livingston did just that, going back to 1987, in the following chart, which compares the total return of BRK.A against the total return of the S&P 500:

Buffett has beaten the S&P 500's pants off for three decades - Source: MarketWatch: https://www.marketwatch.com/story/buffetts-formula-is-still-working-if-you-know-where-to-look-2019-05-22

From 31 August 1987 through 30 April 2019, BRK.A has had an average annualized total return of 14.9%, while the S&P 500 has returned 9.4%.

Livingston then did something in his analysis we don't see very often. He broke up Buffett's investment performance history into three major periods of interest, discovering something a lot of people miss about Buffett's track record as an investor. Most of his outperformance with respect to the S&P 500 came early in this period, where his ability to pick winning investments has declined over time, which you can see in Livingston's second chart:

Buffett beats the S&P 500 in every b ear-bull market cycle - Source: MarketWatch: https://www.marketwatch.com/story/buffetts-formula-is-still-working-if-you-know-where-to-look-2019-05-22

Livingston makes the point in the chart that Warren Buffett bested the S&P 500 in each of these periods, but the thing that stands out to us is that the margin between the two has narrowed as the years have passed. To the point to where from 2007 to the present, Buffett's investing prowess has been consistent with the S&P 500's return, where whether he is beating the index depends almost wholly on random chance for how BRK.A stock compares with the S&P 500 on a given day.

It's no wonder then why the aging billionaire is leaving instructions for his estate to invest in the S&P 500 for the benefit of his survivors after he passes away:

The Oracle of Omaha even said he’s instructed the trustee in charge of his estate to invest 90 percent of his money into the S&P 500 for his wife after he dies, Buffett told CNBC’s Becky Quick in an exclusive interview on “Squawk Box” on Monday.

“There’s been no better bet than America,” he says.

Performing as well as the S&P 500 is so difficult that the index outperforms most active money managers. As diversified investments go over long time horizons, the S&P 500 is very hard to beat.

Previously on Political Calculations

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June 13, 2019

We can now peer into the middle of 2020, where the following chart reveals what we find for the S&P 500's quarterly dividends per share from this point of time before the end of 2019-Q2 until then....

Recorded and Projected Quarterly Dividends per Share for S&P 500, 2018-Q1 through 2020-Q2, Snapshot on 12 June 2019

Although the trend after 2019-Q2 is rising, there's quite a lot of deceleration taking place in what investors expect for future dividends. Particularly when you look at the projected year over year change from 2019-Q2 to 2020-Q2.

Previously on Political Calculations

We last took a snapshot of quarterly dividend futures for the S&P 500 back in early January 2019, when we could only see as far as 2019-Q4. If you click through, you'll find that the dividend payout currently expected for the current quarter of 2019-Q2 is quite different from what was forecast earlier this year!


CME Group. S&P 500 Quarterly Dividend Index Futures Quotes. [Online Database]. Accessed 12 June 2019.

Standard and Poor. S&P 500 Index Earnings and Estimates. [Excel Spreadsheet]. Accessed 12 June 2019.

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