Occasionally, our readers keep us on our toes by asking really good questions. Today, we're going to share part of an e-mail exchange we recently had, in which we get into the nature of when, where, why and how the analytical methods we've developed to anticipate what stock prices will or should be will work. We reckon its a good time to fit that discussion into a regular post since we doubled up on our ongoing series of weekly observations on how the S&P 500 is behaving last week, and because its always a great time to identify and describe a phenomenon that many professional investors may not even know exists.
Here's the e-mail that kicked off the discussion, followed by our response, which we've enhanced by adding links and charts, as well as some text for clarification in boldface font. Enjoy!
I have really been enjoying the S&P 500 posts lately concerning index value vs. trailing year dividends.
Not to make things more complicated than they need to be, but have you ever considered breaking it down into sectors? Would that help to explain even further what is going on in the market?
I ask this question because I think of things like the 2007-2009 market decline. If you just look at the S&P500 index value, you may not have realized the market was in a major decline until early to mid 2008. If you looked at the sectors (e.g., XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY) you would have seen that most of the market sectors were in decline since 2006 or 2007, except for energy and basic materials. They were keeping the index afloat. It would only be a matter of time before they collapsed, too.
I realize that looking at your index vs. trailing year dividends, it's much more obvious that something was up with the market, going from order, to disorder. I just wonder if it would be even more clear if it was broken down on a sector by sector basis.
Thanks for your comments and question!
The main challenge for what you describe is the available data. While it's easy to get the market-cap weighted values for each sector's stock prices, getting market-cap weighted dividend data for the various sectors is a little more difficult (we would have to take each component stock's projected future dividends per share for each sector and weight them according to their market cap within the sector, which would be pretty time consuming.)
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