Stocks

This article includes an Annualized Index Returns table based on Bloomberg data from Barclays, Citibank, JP Morgan, S&P Dow Jones Indexes, and MSCI.

A factor affecting stocks’ sensitivity to movements in the overall market can be measured by VIX, the Chicago Board Options Exchange’s Volatility Index. Any time volatility decreases, correlations automatically decrease.

 

When buying back its own shares, a company uses its cash or raises debt.

The September/October 2013 issue of Journal of Indexes includes interviews with a number of well-respected investment experts. Shown below are edited versions of two of those interviews.

 

John Bogle, founder of The Vanguard Group

Even if current P/E ratios see a small decline, 7% is a very rational expectation for annual stock returns (2% dividend + 5% earnings growth).

 

According to the U.S. Department of Commerce, the typical U.S. corporation reports a 9.3 cent profit for every dollar of sales. Over the past 60 years, there have been only a few times when it has gotten higher (i.e., 10% in Q4 2011). Since 1953, the profit margin has averaged just 5.9% (< 6 cents per dollar of sales).

 

For 2013, taxpayers with > $400,000 ($450k joint return) will pay a 20% tax on qualified dividends and long-term capital gains (15% in 2012). Those whose tax bracket is 10-15% will still pay 0% for qualified dividends and capital gains.

 

As of May 2013, the S&P 500 was trading at 14 times its projected earnings over the next 12 months (source: FactSet). During the market peaks in October 2007 and March 2000, the P/E ratio was 15.2 and 25.6. Its 10-year P/E average (May 2003 to May 2013) was 14.1.

According to Ford Equity Research in San Diego, companies that have reduced by at least 5% the number of their shares (through buybacks) over the previous year have averaged annualized returns of 14% since the beginning of 1998 (through the first part of 2013) vs. a 6.8% annual return for the S&P 500. The index used by Ford is called the Buyback Achievers Index. From its late 2006 inception through May 21, 2013, the PowerShares Buyback Achievers ETF (symbol DRB) had a total return of  35.3% vs. 16.7% for the S&P 500.

 

The S&P Dividend Aristocrats is an index of large companies with a history of increasing dividends each year. Since the index’s October 2011 inception (symbol SPHYDA), its total return was 35.5% (10-21-2011 to 5/20/2013) vs. a 36.2% return for the S&P 500 ETF (symbol SPY).

There is an old Wall Street saying, “Sell in May and go away.” The strategy is also known as the “Halloween indicator.”  More specifically, investors who believe in this strategy should sell their equity positions at the end of April, stay in cash equivalents for six months, and then go back into stocks right after Halloween.