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Over the past three months, the price of the DJIA has moved in line with changes in the two main vectors of its Dividend Discount Value (DDV) which has been particularly volatile. There has been no problem with the DDV model but rather my inability to correctly forecast the rapid changes in the 30-year T bond yield.This article is a low-up to my most recent two articles on TalkMarkets:After 15 years of the 30-year T bond yield being below 4.5% with changes under that level having no impact on the DDV, on September 21, 2023, the 30-year T bond yield broke above 4.5% and rose to 5.11% on October 19, 2023, pushing the DDV down to 32,717. By October 31, the 30-year T bond yield was still pushing the 5.09 level and the DDV had recovered to 32,884 with the DJIA back up to 33,053.The rise in the 30-year T bond yield in the six weeks before the end of October stemmed from the difficulty of attracting sufficient auction buyers to refund the long end of the treasury market. At the end of October into the beginning of November, two things happened:
J. Powel indicated that the Fed was probably through with tightening and would hold the Fed Funds rate steady and lower it in 2024, provided inflation continued its current path.
Janet Yellen moved the Treasury funding from the long end of the bond market to bills.
The combination of these factors resulted in a very sharp drop in the 30-year T bond yield to under 4.5%.
Coupled with a modest increase in the DJIA dividend to a new record of $732.81, the DVD of the DJIA rose to a record 37,618. The price of the DJIA followed rapidly to a new all-time high.
As the price of the DJIA at 37,306 is 312 points below its DDV of 37,618 and the 30-year T bond yield at 4.04%, well below the empirical minimum of 4.5%, the only vector in the DDV model that can change it is the DJIA dividend. With the DJIA dividend payout ratio of 51.6% compared to the long-term average of 63% and earnings recovering from the earnings recession from $1790.18 on February 25, 2022, to $1,399.55 and October 27, 2023, the DJIA dividend is considered secure with room to continue to rise modestly.The DDV model works as it should. The difficulty lies in one’s ability to correctly forecast the direction and level of its two main vectors. The DJIA dividend and the 30-year T bond yield. Forecast these two vectors and there is a 97% probability of correctly forecasting the price of the DJIA.The move from funding with bonds to bills has alleviated the immediate near-term problem. However, it merely kicks the problem down the road. The United States still faces massive and growing debts as well as a huge jump in interest payments. This is keeping the yield curve inverted and credit restricted, as well as pointing to the risk of a recession in 2024. I believe that 30-year bond yields will rise above 4.5% again and the DDV model will fall when they do bringing the DJIA price with it.More By This Author:
