Unexpectedly Intriguing!
03 September 2014

Today, we're going to go through something of a data visualization exercise, as we test drive a new online app (gifmaker.me) for animating images. Starting with the historic monthly stock price data, trailing year dividends and earnings per share data for the predecessor indices and components of the S&P 500 that we recently featured, and also inflation during that era, we've calculated the year-over-year growth rates of each, which we're presenting in the animated image below, showing each with a four second delay.

Animated Charts: Growth Rates of S&P 500 Predecessor Component Stock Prices, Trailing Year Dividends per Share, Trailing Year Earnings per Share and Inflation, January 1912 through March 1925

Since we now have the year-over-year growth rate data for stock prices and trailing year dividends per share, we wondered if we would observe the same phenomenon with the changes in these growth rates that we previously observed with much more recent data from a century later, where changes in the growth rate of stock prices are directly proportional to changes in the future growth rate of trailing year dividends per share, which primarily vary according to particular points of time in the future.

The following animated chart shows our results, as we shift the change in the growth rate of the stock market's trailing year dividends per share forward in time at 3 month intervals every three-quarters of a second until they reach a point where the change in dividends is positioned 12 months in the future, and back again.

Animated Chart: Changes in Year Over Year Growth Rates of S&P 500 Predecessor Component Stock Prices and Trailing Year Dividends per Share, Shifting Dividend Data by 3-month Intervals to 12-months Earlier and Back Again, January 1912 through March 1925

We find that the stock prices of a century ago work pretty much the same as they do today, with investors periodically shifting their forward-looking attention anywhere from 3 to 12 months into the future when making the investment decisions that ultimately set stock prices. The only major difference in the math is that the amplification scale factor would appear to be slightly different over most of the period, and considerably different for the period where the dividends expected to be paid in 1918 were affecting the stock prices of the latter half of 1917.

The downside with the historic data is that we don't have any dividend futures data to really be able to determine what the expectations for the future looked like during this time. The closer correlations that we observe between the changes in the growth rates of stock prices with the changes in the growth rate of trailing year dividends per share expected at different points of time in the future then really represent the situation where the future played out as investors expected.

There are also a couple of short term noise events that really stand out. The first is in April 1916, where we observe the change in the growth rate of stock prices drops well below where expected future dividends would place them, which corresponds to the sinking of the S.S. Sussex, which was shortly followed by President Woodrow Wilson's threat to sever diplomatic ties with Germany. When Germany suspended its unrestricted U-boat campaign shortly afterward, it avoided the U.S. entry into the war, which accounts for the large upward spike in the month afterward.

The other noise event was more positive in nature, coming when the Armistice ending the fighting in Europe was reached in November 1918, which coincided with an upward spike in stock prices. Alas, being a noise event, it was a short-lived affair before investors returned their focus to their more fundamental concerns, where the combination of ongoing highly elevated inflation and falling earnings became dominant.

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