Are Investors Nearsighted or Farsighted?

Political  Calculations
Posted: Jul 16, 2014 12:01 AM
Are Investors Nearsighted or Farsighted?

Are today's stock market investors nearsighted or farsighted?

While that may sound like some sort of psychological issue, for us, that's a real question because of a surprising turn of events last week, when investor expectations for the current quarter of 2014-Q3 suddenly shifted to be virtually identical with those for the more distant future quarter of 2015-Q2. Our chart showing how the change in the growth rate of the S&P 500's stock prices has taken place against the change in the expected growth rates of the index' dividends per share at different points of time in the future shows where things stood as of the close of trading on 11 July 2014.

Change in the Growth Rates of Expected Future Trailing Year Dividends per Share with Daily and 20-Day Moving Average of S&P 500 Stock Prices, through 11 July 2014

While that shift for the expectations for 2014-Q3 (and 2015-Q1) occurred at the open of trading on 9 July 2014, there's no indication yet of it being the kind of pricing anomaly that can periodically affect the values of these futures contracts. And that leaves us with the question: are investors focused on the expectations associated with the nearer-term future defined by dividends in 2014-Q3, or are they still, as they were before the shift, still focused on the expectations associated with the more distant future of 2015-Q2 in making their investment decisions today?

Here's how that shift looks on our alternative futures chart:

Alternative Futures for the S&P 500, 30 June 2014 through 30 September 2014, Snapshot on 11 July 2014

Eventually, the expectations for the future will change and answer the question for us. In the meantime, regardless of which of these alternate futures investors may have focused their forward-looking attention upon, the most likely trajectory for stock prices is the same.

And that's something we wouldn't ever have predicted!