We've seen how investors and traders react on shocking events like COVID-19 outbreak: PANIC, resulting in one the fastest market downturn in history and highest volatility index (VIX) ever recorded. Yet, our proprietary ratio for the S&P 500 indicates a great opportunity to enter the market. Even this is maybe a better momentum compared with 2008's post-market crash.
In addition to our ratio, earnings and dividend yield spreads to Treasury yield are significantly higher than historical numbers, suggesting that stock valuation is cheap within the context of interest rate. Nonetheless, we donï¿½t know when the market will reach the bottom and we warn you: nobody knows!
THE SPD20 RATIO: LOWEST IN HISTORY
SPD20 is a proprietary measurement of Christmas Corporation to project long-term market return. My study compares change in S&P 500 index (SPX) versus change in dividend of S&P 500 over the last 20 years ï¿½ a scientific paper is underway!
My research finds:
1. High negative correlation between SPD20 and market return over the next 10 years
2. Dividend is more reliable than earnings that may be affected by accounting rules.
3. SPD20 and dividend yield are significant variables to forecast long-term return of stock market (see: regression result).
Calculation example: if for the past 20 years the S&P 500 index grew from 1000 becoming 2000 and dividend grew from 25 becoming 75, then: SPD20 = (2000/1000) / (75/25) = 0.67
A ratio below 1 indicates that the S&P index movement lags its dividend growth, usually an opportunity for long-term investors to produce above-average return over the next 10 years. Note that post world war average return of the S&P is 10.8% per annum.
So, what is the most recent ratio and how did it compare with historical numbers?
Table 1: Most Recent SPD20 Ratio
Table 2: SPD20 is at the Lowest Ratio Since World War 2
Excerpts from Table 2:
The U.S. may have the Reagan Era back. It was started after the famous Tax Cuts in 1980ï¿½s that led to 18% per annum return since Reaganï¿½s 1st term up to Clintonï¿½s 2nd term.
Low SPD20 ratio tend to produce a much better outcome over the next 5 and 10 years.
The dot-com bubble forged an overvalued market, followed by a decade of pale investment return, made worse by the Great Recession.
Table 3: Earnings Yield and Dividend Yield vs Treasury
The lowest SPD20* ratio in history, supported by a wide spread of earnings yield and dividend yield vs Treasury yield suggest a great investment opportunity over the next 5 and 10 years. The numbers are even better compared with post Great Recession. In other words, the market is very cheap based on those metrics.
Nonetheless, please note that:
- Global failure on efforts to flatten the curve of Covid-19 cases (as happened in China) may lead to a severe recession.
- Stock market moves based on sentiments and investorsï¿½ psychology. There is no way to predict market bottom, even if there are positive news of combating the virus.
Human race have survived wars, economic recessions and depression, Spanish flu and other outbreaks. We hope this crisis will soon be over. Meanwhile, stay safe!
*SPD20 ratio is my recent research and currently is in progress to be a scientific paper.
**All total return calculations include change in index price and reinvestment of dividends.
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Risk information. Past performance is not a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. The investor must particularly ensure the suitability of an investment as regards his/her financial and fiscal situation and investment objectives. The investor bears the risk of losses in connection with an investment.
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