Last week provided a pretty neat example of how changing expectations of dividends that will be paid in the future cause today's stock prices to change in response.
Our first chart shows how the expectations for the equivalent amount of dividends per share for the S&P 500 that are expected to be paid out in the first quarter of 2014 changed from Friday, 23 August 2013 through Wednesday, 4 September 2013 (when we created the following chart), along with the change in the closing value of the S&P 500 index on each day:
The scaling was automatically selected by Microsoft Excel when we created the chart - we haven't done anything to tweak it.
In looking at the chart, we see that the expectations for future dividends per share changed first on Monday, 26 August 2013, dropping by 11 cents per share, and was proportionately followed a day later by S&P 500 stock prices, which dropped by $33 per share. On Wednesday, 4 September 2013, we see that the expected dividends per share for the quarter suddenly jumped higher, as stock prices followed suit on the same day, but did not jump as high.
That's likely because of the effect of another set of expectations that is currently affecting stock prices. In addition to their fundamental driver of expected future dividends per share, stock prices today are also being greatly affected by investor expectations for the Federal Reserve's current program of quantitative easing.
Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.
Be the first to read Political Calculation's column. Sign up today and receive Townhall.com delivered each morning to your inbox.
New Time 11:20 AM PT: Get the Market Movements in Advance: William's Edge Webinar for Thursday April 24th, 2014 | John Ransom