There's no better way for us to make the point we wish to make today except to animate our alternate futures chart, where we've taken each of the versions of the chart that we've posted since 10 March 2014 and run through 4 April 2014:
Now, here's what you need to know:
- The first two stills (or frames) for the animation make no adjustment for the echo effect, which accounts for the minor shift in the futures between these frames and later ones.
- What the animation above captures is the shift in forward-looking focus for investors from 2014-Q4 to 2014-Q3. This change was solely driven by Janet Yellen's comments on 19 March 2014.
- After that shift in focus, the behavior of stock prices has been such that they have oscillated about the central projected trend range for the alternate future associated with 2014-Q3 (shown in green) within the typical range we would expect as indicated by the vertical error bars (also shown in green).
- Put another way, whenever stock prices have deviated away from the central projection of the alternative future defined by expectations for dividends to be paid in 2014-Q3, they have ultimately reverted back to it.
- The future for investors changed on 27 March 2014, as the dividends investors expect to earn in 2014-Q2, Q3 and Q4 declined. This change in expectations is captured in the animation above as the large downward shift for each of the alternate futures shown with the frame illustrating the actual S&P 500 through 28 March 2014.
Since our animated chart only features the charts that we have publicly posted since 10 March 2014, here are the links to the original stills:
- Rewriting the Alternate Futures - 10 March 2014
- Shifting Focus for the S&P 500 - 17 March 2014
- A Better Frame of Reference, Mean Reversion and the S&P 500 - 18 March 2014
- Yellen Picks the Future for Investors - 20 March 2014
- Four Witches and the S&P 500 - 24 March 2014
- Extending the Alternate Futures - 31 March 2014
Speaking of negative changes in the future that investors expect, here is what we now project for stock prices through the end of 2014-Q2:
Stock prices will generally follow the trajectory defined by the future point in time to which investors have fixed their forward-looking attention. From the current established trajectory defined by a focus on 2014-Q3, the effect upon stock prices of a shift in investor focus to the future by 2014-Q4 would be positive, while a shift to either 2014-Q2 or to the more distant future of 2015-Q1 would be negative.
Finally, here are the changes in the growth rates of expected future trailing year dividends per share for the S&P 500, which are the basis for our alternative future projections.
We'll see how a brand new earnings season might introduce noise or other potential shifts in focus in driving stock prices.