Today, Starbucks is the world’s number one specialty coffee retailer and its target market is any person of any age. Normally, we would show the outcome of that math in a chart that covers 10 years worth of data for the S&P 500, in which we would perhaps animate to illustrate the shifts in the future points of time in which investors are focusing their attention in setting stock prices. The first companies to respond did so after the close of market trading the very next day, on 15 November 2012.
But then, the change in the growth rate of stock prices decoupled from the expected change in the growth rate of dividends per share for that quarter, as investors suddenly shifted their focus backward to the fourth quarter of 2012 instead. Or rather, we’ve found that we cannot rule out that stock prices behave as if they fall into a normal distribution during such periods.
Once investors shift their gaze to a more distant future quarter however, we can expect stock prices to fall sharply, as the expected change in the growth rate of trailing year dividends per share for 2013-Q3 and 2013-Q4 are both deeply negative. During these periods of relative stability and order, we’ve found that stock prices behave as if they fall into a normal distribution.
In the past, we observed that stock prices decoupled in the positive direction while the Fed operated its previous QE efforts, which we saw take effect within their first months. More specifically, we’re going to take you back in time to the turn of the last century, when physicist Niels Bohr first came up with a working model of the hydrogen atom. Here, the most advanced theories of physics at the time couldn’t explain why hydrogen gas, when heated up until it glowed, would only emit light at certain wavelengths of the visible light spectrum when the light was passed through a prism.
What becomes readily apparent is that the trajectory of stock share prices versus trailing year dividends per share tends to move in roughly straight lines over extended periods of time. There is however, no evidence that stock prices have ever followed a normal distribution for periods much longer than that, as disruptive events occur that alter the effective energy state of the stock market, with order ultimately re-emerging at a different level of equilibrium. When dividends didn’t follow corporate earnings and stock prices upward, it became inevitable that a severe disruption would take place.