We Are Still Far from Normal
We are is still far from normal. I am talking about the U.S. economy. First let’s answer the question, “Are we in a recession?” Yes, since it meets the definition of a recession outlined by the National Bureau of Economic Research. See the definition below from 2008.
“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.”
In June 2020, the NBER determined that a peak in quarterly economic activity occurred in Q4 2019. The NBER also determined that the monthly peak occurred in February 2020. So, if we are past the peak then it is really a matter of determining the trough to determine the duration of the recession.
One useful set of data that provides quarterly market insights is the Economic and Market Update put out by JP Morgan Asset Management. It provides a summary of economic and market data from various sources. The last one was covered U.S. economic activity through the end of Q2 2020. It clearly shows that we are from normal. The chart below shows U.S. economic recessions since 1910. The current recession exhibited a 12.8% decline in real Gross Domestic Product or GDP. This is the second largest decline after the Great Depression. The magnitude is even larger than the Great Recession. However, the duration is still not determined.
Recovering But Still Far From Normal
That said, the duration may be longer than expected. The chart below shows that besides mortgage applications and driving direction usage most economic activity is lower than before the pandemic started spreading through the U.S. For the most part Americans are still not dining out, they are not flying, and they are not staying in hotels. They are trending up, but it belies the expectation of a V-shaped recovery. Clearly, the data in this chart shows we are still far from normal. There are some companies and industries that are benefiting from the pandemic as people and even businesses change how they operate. By for the most part, most sectors are expected to show lower earnings in 2020 compared to 2019.
Let’s take a look at one more chart. The chart below shows U.S. unemployment and wages since 1970. You can see that the unemployment rate far exceeded the previous high in the early-1980s and in 2009. We are down to about 10.2% unemployment from the peak. This is still higher than almost all previous recessions since 1970 except one. The long-term unemployment rate is 6.2%. Again, we are clearly still far from normal.
One interesting observation in this chart is that during almost all earlier recessions wage growth declines when unemployment goes up. This makes sense and is logical. When the pool of unemployed people is high companies do not need to increase wages too much to attract talent. On the other hand, the current recession shows a spike in wage growth. This is due to the high level of federal stimulus that led to more cash for many consumers. Total federal stimulus was about $2.441 trillion or ~11.8% of GDP. This does not include monetary stimulus from the Fed. You can also see though that wage growth is coming down quickly as the benefits expire or run out. My guess is that this will likely lead to a slowdown in the U.S. economy as consumer spending slows.
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List of Dividend Contenders in 2020
I updated my article on the List of Dividend Contenders in 2020. Interestingly, the number has increased to 271 from 265 at the beginning of the year. This is despite the COVID-19 pandemic resulting in many dividend cuts and suspensions. The Dividend Contenders are stocks that have raised the dividend for a minimum of 10 consecutive years and no more than 24 straight years. Once a stock reaches 25+ consecutive years it graduates to Dividend Champion status.
Four long-time members of the Dividend Contenders graduated to the Dividend Champions list. This includes Canadian National Railways (CNI), International Business Machines (IBM), Polaris Inc (PII), and RenaissanceRe Holdings (RNR). These stocks hit the 25-year mark for consecutive dividend growth.
There were several deletions and additions. Take a look at the list in the article.
Coronavirus Dividend Cuts and Suspensions List in 2020 – We Are Still Far From Normal
I updated my coronavirus dividend cuts and suspensions list this past Wednesday. The number of companies on the list has risen to 349. We are over 10% of companies that pay dividends having cut or suspended them since the start of the COVID-19 pandemic. The number of companies on the list continues to rise each week.
This past week there were two companies added to the list, but I also included another seven companies that I had previously missed. The two new companies were Aegon N.V. (AEG) and Cominar Real Estate Investment Trust (CMLEF).
The seven companies that I missed were America First Multifamily Investors (ATAX), Big 5 Sporting Goods (BGFV), Valhi (VHI), Pennant Park Investment (PNNT), Cherry Hill Mortgage Investment (CHMI), Renault SA (RNSDF), and Daimler AG (DDAIF).
None of the companies listed above are really dividend growth stocks. I added Renault and Daimler since they are fairly large car companies and have relatively large followings on Seeking Alpha although they are European car companies.
One interesting item is that Foot Locker (FL) reinstated it is dividend, but at a lower level than before the pandemic. The new regular quarterly cash dividend is $0.15 per share. This is roughly 63% lower than the earlier dividend at $0.40 per share. The new dividend will be payable on October 30, 2020 to shareholders of record on October 16, 2020. The slow drip of dividend reinstatements likely points to increasing financial stability and visibility for some companies.
Stock Market Volatility – CBOE VIX
The CBOE VIX finished this week slightly higher than last week at 22.5. It still remains elevated relative to the long-term average. The long-term average is approximately 19 to 20.
There is really no news driving the VIX higher or lower at the moment in my opinion. It looks like the weekly number of new COVID-19 infection cases has stabilized and is trending slightly down. This is a positive. In addition, some companies are doing better than the low expectations that were priced into stocks. On the other hand, the economy is still gloomy. The number of new unemployment claims went up over 1.1 million this past week, unexpectedly. This just points to the uncertainty of the job market.
Looking forward though, the main overhang on the market right now and keeping the VIX elevated is arguably the lack of new federal stimulus. There is likely an overhang from the fact that monthly federal unemployment insurance boost and stimulus and recovery rebate checks have expired. There is some extra money being redirected by the administration, but it is half of the $600 per week at best and will likely not last more than a month or two. Ultimately, new federal stimulus will need to be passed by Congress.
Fear & Greed Index
I also track the Fear & Greed Index. There are seven indicators in the index. They are Stock Price Breadth, Put and Call Options, Stock Price Strength, Junk Bond Demand, Safe Haven Demand, Market Momentum, and Market Volatility.
The current reading is now at 70, which is in Greed. This is the down two points from last week. The index has been in Greed now for six straight weeks. Note that this index rarely stays above 60 for an extended period of time. Typically, once this index goes over 60 there is a move down. However, this is not a hard and fast rule. Sometimes the index does go higher to even over 80. Historically, once the index goes over 80 it comes down pretty fast.
Several of the underlying sub-indices are signaling Extreme Greed, while others are signaling Greed. This is largely due to the breadth and duration of market momentum. Recall that Fed is still providing a large amount of monetary stimulus. Only the Market Volatility sub-index is signaling Neutral due mostly to the elevated trailing CBOE VIX. In any case, we are probably due for a pull back in the Fear & Greed Index.
Market Valuation – Still Far From Normal
The S&P 500 is trading at a price-to-earnings ratio of 29.2X and the Schiller P/E Ratio is at about 31.3X. These have ticked slightly up again since last week. Note that the long-term mean of these two ratios are 15.8X and 16.7X, respectively. I continue to believe that the market is largely overvalued at this point. In my opinion caution is warranted for investors.
S&P 500 PE Ratio
Shiller PE Ratio
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.