Once again, the change in the growth rate of stock prices has re-converged with the change in the growth rate of dividends expected in 2015-Q2 in our standard baseline model of how stock prices work. Mind the notes in the margin in the latest update of our favorite chart below.
What that means, of course, is that if one recognizes that investors are focused on the future quarter of 2015-Q2 in setting today's stock prices, stock prices are currently just about exactly where they might be expected to be!
Since this is a new description for us, "standard baseline model" refers to our original model, where we've incorporated historic price and dividend data from one year ago as the baseline from which we project each of the alternative trajectories that stock prices today might follow. Those trajectories are then distinguished by the expectations of the changes in the growth rate of dividends that are expected at different points of time in the future. As we've long observed, stock prices will tend to converge with the trajectory that coincides with the expectations associated with the specific point of time in the future to which investors have focused their forward-looking attention as they make investment decisions today.
The data suggests that investors have been and are currently focused upon 2015-Q2 in setting today's stock prices, since this quarter marks the period of time at which the Federal Reserve is most likely to act to increase short term interest rates in the U.S. for the first time in several years.
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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