Has the Market Gotten Ahead of Its Fundamentals?
At this time each year, while the market confounds investors and scales new heights, I like to reflect on the constant talk that market prices look expensive. One narrative has been that the market was driven by global liquidity, monetary policy and the U.S. Federal Reserve (Fed)—and as the Fed continues along its path to hike interest rates, we’d see less support for market prices.
The chart below shows that these last seven to eight years have NOT been just a Fed-driven market, but rather that there have been solid fundamental signs underpinning the market rally. The chart tracks the growth of the Indicated Dividend Stream® for the U.S. markets (measured by the indicated dividends of the WisdomTree Dividend Index) and compares it to general trends in market prices.1
Dividend Growth Outpacing Price Growth
Dividend Growth: In the last nine years, the indicated Dividend Stream has grown 58%, from $289 billion to $456 billion. This was higher than price growth over the same period.
Price Growth: Tracking the market price change—measured by price changes on the Russell 3000 Index—market prices did not keep pace, only growing at a clip of around 53%.
Using a dividend change versus price change model, one could say the market has gotten less expensive on a price-to-dividend basis, as dividends grew faster than market prices. This is the underlying fundamental support I refer to in saying this was not just a Fed-driven market.
Note: Price levels of dividend payers (the WisdomTree Dividend Index) were up 36.6%, which is less than those of a broad market such as the Russell 3000. But the higher average dividend yields over this nine-year period more than made up for the slower price growth on a total return basis, and total returns for the WisdomTree Dividend Index over these last nine years were slightly ahead of the Russell 3000.
For standardized performance of the WisdomTree Dividend Index, click here.
Future Trends for Dividends
We recently highlighted that this year’s growth in the total indicated Dividend Stream was the slowest growth since 2010, perhaps leading to some concern that the fundamentals underpinning this market higher are turning into a market headwind.
But WisdomTree believes dividends are likely to stay in focus over the coming years, as new corporate tax policy takes center stage. Both the reduction in the effective tax rate that President-elect Trump says he will focus on as well as plans to encourage U.S. firms to repatriate some of their foreign cash that has yet to be taxed in the U.S. should continue to bolster U.S. dividend growth prospects.
While dividend growth was averaging double digits for a number of years, it is unlikely to be able to sustain those levels for more than short periods, and we believe we could see dividend growth at above-average rates over the coming four to five years. This would continue to be supportive for the markets.
1The WisdomTree Dividend Index approximates the dividends paid from the U.S. markets, and thus, tracking price trends of a broad index of the U.S. markets (the Russell 3000 Index) is an apt way to compare price trends and dividend trends.
Important Risks Related to this Article
Dividends are not guaranteed, and a company currently paying dividends may cease paying dividends at any time.
Jeremy Schwartz has served as our Global Chief Investment Officer since November 2021 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity Indexes, quantitative active strategies and multi-asset Model Portfolios. Jeremy joined WisdomTree in May 2005 as a Senior Analyst, adding Deputy Director of Research to his responsibilities in February 2007. He served as Director of Research from October 2008 to October 2018 and as Global Head of Research from November 2018 to November 2021. Before joining WisdomTree, he was a head research assistant for Professor Jeremy Siegel and, in 2022, became his co-author on the sixth edition of the book Stocks for the Long Run. Jeremy is also co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” He received his B.S. in economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Jeremy is a member of the CFA Society of Philadelphia.