Political  Calculations

You may have noticed that stock prices have been flailing around quite a lot lately:

What we can tell you is that investors have been reacting to quite a lot of noise in the market, specifically related to what actions the Federal Reserve might take with respect to a new round of quantitative easing.

We know that noise is behind the change in stock prices, because the fundamental driver of stock prices, the cash dividends per share that are expected to be paid in the future, have been rising sharply since 12 September 2011.

S&P 500 Index Value, 1 September 2011 through 23 September 2011

We know that the change in expectations for what the Federal Reserve will be doing with respect to a new round of quantitative easing because of the timing for when stock prices underwent their most significant change biggest dip for the month on 22 September 2011. Here, when it became apparent that the Federal Reserve would not follow through on the expectation that it would launch QE 3.0 any time soon, stock prices reacted in response.

In this case, stock prices fell because investors had to suddenly factor in the increased potential for deflationary or near-deflationary conditions to re-emerge.

Expected Future Trailing Year Dividends per Share for the S&P 500, as of 26 September 2011

Political Calculations

Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.

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