Thursday , 25 May 2017


What Are the Most Important Stock Market Drivers Forecasting?

We have found that very few investors understand what really drives the stock market.investing-2 In our view, the four primary drivers of market valuations are earnings, dividends, interest rates and inflation. If you can quantify what is going on with those four variables, our models indicate that you can predict about 90% of the annual movement of stock prices…Within those four variables, there are two that stand out above the others as being the most important drivers. We’ll take a look at each factor and then conclude with what it means for stocks.

The above introductory comments are edited excerpts from an article* by Greg Donaldson (risingdividendinvesting.blogspot.co.il) entitled The 4 Drivers Of Stock Market Prices.

Donaldson goes on to say in further edited excerpts:

Below is a look at each factor:

Earnings

Most investors look to earnings as the primary guide of what a company is worth. In theory, that makes sense. If Company A is earning $500 and Company B is earning $1,000 — wouldn’t you rather own Company B?

The problem with earnings is that they can be engineered by creative corporate executives. In times of recession, earnings are particularly volatile. Earnings can be calculated in a variety of different ways, which adds additional complexity. We don’t think earnings should be completely discounted in valuing companies or the stock market as a whole. However, the unpredictable nature of earnings often gives very bad signals at turning points in the market.

Dividends

We have found dividends to work much better than earnings. Over the past 50+ years, dividends have had approximately three times more predictive power than earnings.

Let’s say you own two rental properties. One rents for $100 per month and the other rents for $200. If both rents are increasing at 3% per year and both will continue to rent for the next 20 years, which rental property would be worth more to you? The one that will pay you the most in rental income over its useful life… right?

John Burr Williams was the first to apply this theory to stocks. He said the value of a stock today is the sum of all future dividend payments discounted back at some required rate of return. In other words, the more a company pays out to its owners in the future, the more valuable that company is to its owners today.

Not only does that theory make “real world” sense, but it also holds up statistically. In our models, we’ve found that dividends are the most important driver of stock prices by a wide margin.

Interest Rates

Interest rates are a primary concern for most stock investors. The general level of interest rates essentially represents the “opportunity cost” of investing in stocks.

If your bank account were to start offering 10% per year on your savings account, you would probably prefer to “invest” in your savings account rather than in the stock market. If your bank account is only paying 0.1%, however, the attractiveness of investing in stocks increases.

Many investors would be surprised, however, that interest rates are not the most important factor in determining long-term stock prices.

Inflation

Inflation is actually a much more significant predictor than interest rates. How can that be? There are several reasons for this.

  1. Interest rates can be artificially set by the Federal Reserve. Inflation can be influenced by Fed policy, however, it is primarily a result of real world economic activity.
  2. Inflation is also one of the primary drivers of interest rates. If inflation is rising, it has the effect of diminishing the real rate of return for a bond investor. In that environment, a bond buyer will demand a higher rate of interest to compensate for the loss of purchasing power.
  3. In addition, inflation is impacted to a large degree by economic growth. When the economy is growing at a faster rate, the Federal Reserve will generally tighten monetary policy, which raises interest rates.

The importance of inflation is also reflected in several of our models. We have a price-to-earnings (or “P/E”) Finder model that we use to determine the appropriate P/E ratio for stocks. In that model, inflation has been a much better predictor of P/E than interest rates, GDP growth or earnings growth expectations.

Outlook for Stocks

If you can understand these four variables, you can get a fairly accurate gauge of the valuation of the market. At this moment, all of these variables are very positive for stocks.

  • Dividend growth for the S&P 500 has been over 10% year-to-date. We believe this will continue to be strong in 2015. Companies are beginning to understand how valuable their dividend checks are to shareholders and have begun to emphasize dividend growth as a priority.
  • Earnings are expected to grow by over 10% in 2015. Time will tell whether that will come true or not. If it does, we anticipate the market will reward the companies for their continued strong performance.
  • Inflation remains very low. With little capacity pressure from either employment or plant and equipment, we don’t see much of a chance that inflation gets higher than the Fed’s target of 2.5%. The economy is simply not growing fast enough.
  • With inflation low and the Fed continuing their stimulative monetary policy, interest rates are likely to remain low. The 10-year Treasury continues to trade at the low end of our 2013 prediction of between 2.5% and 3.0%. We don’t anticipate that rates will get much higher than that over the near term.

…Monetary policy conditions are very favorable. Aside from a major geopolitical shock, stocks don’t face any major red flags going into 2015.

The most current reading from our S&P 500 valuation model indicates that the fair value of the market is about 1,950. As this is being written, the S&P 500 is trading at about 1,952.

Conclusion

From both a directional perspective and a valuation perspective, our models are saying that stocks are still the place to be.

Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

*http://www.risingdividendinvesting.blogspot.co.il/2014/10/the-4-drivers-of-stock-market-prices.html

If you liked this article then “Follow the munKNEE” & get each new post via

Related Articles:

1. History Says “Expect An Economic Crash AGAIN In 2015″ – Here’s Why

Large numbers of people believe that an economic crash is coming next year based on a 7-year cycle of economic crashes that goes all the way back to the Great Depression. Such a premise is very controversial – some of you will love it, and some of you will think that it is utter rubbish – so I just present the bare bone facts below for you decide for yourself if it is something to seriously consider protecting yourself from in 2015. Read More »

2. Take Note Because Those Investors Who Ignore These Observations Do So At Their Great Peril

Is a major top at hand? It is often said that bells do not ring to signal the end of a bull market but if the broad averages were in fact to plummet in the weeks ahead, never forget that bells did indeed ring. This article contains the opinions of three heavyweights in the guru world which are so insightful that any investors who ignore their observations do so at their great peril. Read More »

3. This Weekend’s Financial Entertainment: “A Stock Market Crash IS Coming!”

Our financial system is in far worse shape than it was just prior to the financial crash of 2008. The truth is that we are right on schedule for the next great financial crash. You can choose to ignore the warnings if you would like but, ultimately, time will reveal who was right and who was wrong and, unfortunately, I think I will be proven to have been right. Read More »

4. Coming Stock Market Enema Will Be A VERY Messy Occasion!

Who knows how long before the Dow Jones Index finally receives a well overdue market enema, but I can assure you of this, when it arrives it will be a VERY messy occasion! Read More »

5. Present Bull Rally In Stocks Dangerously “Beyond the Pale” – Here’s Why

It is frighteningly clear to any objective analyst and/or intelligent investor that the present bull market rally in stocks (2006-2014) is “beyond the pale” (outside the bounds of acceptable behavior) i.e. the excess valuation is dangerously above the market excesses of the 1920s. Read More »

6. We’re All Cued Up For A Bear! Here’s Why

When taking a step back and viewing longer-term gauges, we see warning signs flashing. Many of these readings are in extreme territories, and historically bear markets have occurred from such overbought positioning. We are all cued up for a bear! Read More »

7. Take Note: A Bubble Isn’t Necessary To Have A Sharp Decline In Stocks

With valuations stretched, investors seem to be justifying their stock purchases here with the argument that we have yet to reach the mania of 1999-2000 but history has shown us that there doesn’t have to be a bubble for there to be a sharp decline in stocks. As we saw in 2007, it doesn’t mean there is no risk of a significant market decline or that valuations are compelling and that investors should be expecting above average long-term returns from here. They should not. Read More »

8. SELL! U.S. Stock Market Is An Investor’s Nightmare – Here’s Why

The stock market is presently a roulette wheel with dimes on black and dynamite on red. We continue to have extreme concerns about the extent of potential market losses over the completion of the present market cycle. Read More »

9. Myth #1: There Is A Direct Relationship Between Interest Rates & Stock Prices

Events and conditions do not make investors behave in any particular way that can be identified as shown in this analysis of the supposed relationship between interest rates and stock prices. So much for the popular claim that “Interest rates drive stock prices”! Read More »

10. Interest Rates Play A MAJOR Role In the Behavior Of the Stock Market – Here’s Why

To understand how the stock market behaves it is imperative to realize that the stock market is overwhelmingly influenced by interest rates. It’s difficult to overstate this key fact. Interest rates are the bone and marrow of the stock market. More specifically, the stock market is ruled by long-term and short-term interest rates creating an overriding framework for what drives the market in which different sectors do better or worse at different points in the economic cycle. This article explains the behavior more fully. Read More »

11. Coming Bear Market Could Turn Into A Historic Crash – Here’s Why

Amazingly, we are on the verge of a global deflationary downturn and what could be a historic bear market, yet Wall Street prognosticators remain focused on the inflationary risks of excessive monetary stimulus. Their focus could not be more wrong. Let me explain further. Read More »

12. This Indicator Is 94% (Yes, 94%!) Negatively Correlated to Future Stock Market Returns!

What investors are actually doing with their money – acting out of fear or greed – is a better predictor of future stock market returns than even Buffett’s favorite, and highly touted, total market capitalization-to-GNP valuation measure. How do we use this information as a contrary indicator? How do we put it into practice? Read on. Read More »

13. It’s Just A Matter Of Time Before the Stock Market Bubble Is Pricked! Here’s Why

Once again the stock market is in full bubble mode. The market was already overvalued earlier this year and the froth continues to build. Valuations are off the chart and euphoria is setting in while, at the same time, you have inflation eroding the purchasing power of regular Americans not participating in this casino. All the signs of a bubble top are there – massive speculation, unexplainable valuations, and blind optimism – even though the fundamentals don’t make any sense. This article substantiates that contention. Read More »

14. These 6 Indicators Reveal A Great Deal About Market’s “Upside” Potential

Trying to predict markets more than a couple of days into the future is nothing more than a “wild ass guess” at best but, that being said, we can make some reasonable assumptions about potential outcomes based on our extensive analysis of these 6 specific price trend and momentum indicators. Read More »

15. What Does the 10-year Yield’s Death Cross Mean For Stocks?

The 10-year yield’s Death Cross has proven to be a pretty significant risk-off shot across the bow over the last decade and this matters today because the 10-year yield put in a Death Cross back in early April of this year. So what does the 10-Year’s Death Cross mean for stocks this time? Read More »

16. Financial Asset Values Hang In Mid-air Like Wile E. Coyote – Here’s Why

The financial markets are drastically over-capitalizing earnings and over-valuing all asset classes so, as the Fed and its central bank confederates around the world increasingly run out of excuses for extending the radical monetary experiments of the present era, even the gamblers will come to recognize who is really the Wile E Coyote in the piece. Then they will panic. Read More »

17. Look Out Below? Buffett Market Indicator Has Now Surpassed 2007 Level

Market Cap to GDP is a long-term valuation indicator that has become popular in recent years, thanks to Warren Buffett and it is now at the second highest level in the past 60 years – even surpassing the levels reached in 2007. Read More »

18. World’s Stock Markets Are Saying “Let’s Get Ready to Tumble!”

To ignore all the compelling charts and data below would be irresponsible and, as such, will NOT go unnoticed by institutional investors. Such bearish barometers for stocks worldwide will, unfortunately, be ignored by the ignorant and gullible hoi pollo causing them severe financial loss as investor complacency in the past has nearly always led to a stock market crash. Read More »

19. Stock Market Bubble to “POP” and Cause Global Depression

In their infinite wisdom the Fed thinks they have rescued the economy by inflating asset prices and creating a so called “wealth affect”. In reality they have created the conditions for the next Great Depression and now it’s just a matter of time…[until] the forces of regression collapse this parabolic structure. When they do it will drag the global economy into the next depression. Let me explain further. Read More »

20. Call the “Smart Money’s” Bluff & Stay Invested – Here’s Why

Brace yourself! The stock market is ripe for a nasty selloff according to a number of politicians and even more market pundits – but not so fast. Two very reliable long-term recession indicators strongly suggest that a correction – or worse, the end of the bull market – is highly unlikely given the current state of the economy. Let me explain. Read More »

21. All Is NOT Hunky Dory In the Stock Market – Here’s Why

We look at this market and we see “too much.” Too much divergence, too much complacency, too much embedded downside risk…the list goes on and covers many things. Let’s make the rounds and see what we find [and what it means for the immediate well-being of the various stock markets.] Read More »

22. Mixed Signals About Direction of Stock Market Abound – Here Are 10

[No wonder you are confused!] Several technical and fundamental indicators have flashed caution to no avail and this has given way to an uncomfortable tension beneath the surface as investors try to find answers while keeping pace with performance. Below are 10 mixed signals about the near-term direction and theme of the markets. Read More »

23. Bubble-level Valuations Don’t Cause Bear Markets! These Factors Do

So much analysis we see and hear lately is concerned with whether the stock market is in a bubble or not. The truth of the matter, however, is that bear markets do not begin due to bubble-level valuations being reached and then bursting, but in anticipation of half a dozen mitigating factors as outlined in this article. Read More »

24. What Are the 2 Catalysts That Cause Major Market Corrections Telling Us Today?

There are a number of potential pitfalls out there for the market but, right now, the behavior of the main catalysts for a major correction suggest that there continues to be more right than wrong with the market. Let me explain. Read More »

25. A Stock Market Correction/Crash May Not Occur For Quite A While – Here’s Why

Some investors are sure we’re heading for a crash because we’ve had such an uninterrupted rise in stocks but these things can last much longer than most people realize. While a crash is never out of the realm of possibilities, just because stocks are up doesn’t mean they have to immediately crash. Eventually they will be right. It’s the timing that gets you on these type of calls. Read More »

26. Inflation Will Become a Huge & Growing Problem Beginning In 2015 – Here’s Why

A temporary period of deflation will result from the end of the Fed’s massive asset purchases followed by a period of inflation that will make the ’70s seem like an era of hard money. Here’s why. Read More »

27. High Inflation IS Coming – It’s Just A Question Of When – Here’s Why

There have been many econoblog posts of the form, “ha, ha, the people predicting inflation have been wrong so far, when will they give up?”. Let me try to explain why we know high inflation is coming eventually. Read More »

28. Interest Rates to Remain Low As Far As the Eye Can See? Perhaps, BUT

Everyone knows that interest rates are going to rise in the future so the real question is not whether they will rise, but when and by how much. [This article analyzes when that will most likely be.] Read More »