Aside from that, we would also see greater volatility in the price portion of the data, since we would be looking at a smaller section of the market.
Apple provides a pretty good example of what we mean here. Individual stock prices, like Apple's, are really volatile over time, as there is often a lot of speculation (or noise) affecting them in addition to the more fundamental driver of their dividends (or signal). If you recall last year, Apple's stock price ran up considerably in the months and weeks leading up to their announcement that they would initiate a cash dividend on the speculation that they would do so.
After they announced it, Apple's stock price began to fall. But the S&P 500, of which it became the largest component, did not, even though it had been rising with it.
The reason why is because of an effect that we'll call "conveyance". Here, Apple's stock price rose on the speculation of investors who on having bought on the rumor, after their dividend announcement, sold on the news.
Much of that money stayed in the stock market, going to buy other stocks as investors sold off their shares of Apple as they rebalanced their portfolios. That rebalancing, in turn, allowed the S&P to keep rising (and sustain its value), keeping in tune with the index' increased level of dividends. In effect, Apple's dividend was conveyed throughout the entire index, supporting its (the index') valuation, even though Apple's stock price itself fell in the weeks and months that followed.
We capture that effect in looking at the entire index, but can lose the strong correlation when looking at sectors or individual stocks, where the conveyance effect can be affected by investors rotating into or out of particular sectors or stocks, making them much more volatile than the index as a whole.
Quick history: The starting and ending dates we selected for our charts above coincide with the date at which dividend futures contracts for 2011-Q4 and 2012-Q2 expired. The serious speculation that Apple would initiate a dividend began after the expiration of the 2011-Q4 futures contracts. Apple made the announcement that it would begin paying a dividend on Monday, 19 March 2013.
Its stock price was buoyed up for another three weeks as the speculative bubble inflated (see our third chart in this post), peaking on 9 April 2012 as investors finally began to realize that the company's stock price was getting too disconnected from where its own fundamentals would place it, after which the conveyance effect really kicked in.
You can see that in the second chart that we've added to our original exchange above, where most of the conveyance effect took place between 9 April 2012 and 30 April 2012, after which Apple's stock price and the rest of the S&P 500 resumed following mostly matching trajectories, which is what we should expect for the new 800-pound gorilla of the S&P 500.
Since the end of the Apple speculative bubble in May 2012, the S&P 500 has mostly followed a stable trajectory, as the market has largely continued in the period of relative order that began in August 2011.
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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