The Market Has Changed
The market has changed. What do I mean by this? I am talking about the coronavirus, which has changed the market and sector valuations. The market has changed because consumer behavior has changed. The market has also changed because remote working will change where and how we work not only during the pandemic, but I argue also in the future.
The chart below shows the ETF sector prices since February 17th until November 13th. I used Stock Rover* to make the chart. Most of the market was trending up or at least flat until about mid-February. As the coronavirus pandemic spread across the U.S. and lockdowns were implemented the stock market responded with significant declines bottoming out in mid-March. Since then, the recovery of some sectors has been remarkable. You can see the sector and ETF sector ticker along with year-to-date gain or decline in the table below the chart. However, even after accounting for the recovery in the market, four sectors, which are energy, financials, utilities, and commercial real estate are still negative. This is even after the recent run up after the U.S. election and the announcement of a vaccine for coronavirus by Pfizer (PFE).
|ETF Ticker||Sector||YTD Performance (%)|
|XLRE||Commercial Real Estate||-8.5|
The Market Has Changed Since Consumer Behavior Has Changed
One of the main reasons that the market has changed and valuations have changed for certain sectors is that consumer behavior has changed. First and foremost, consumers are eating more at home. Consumers are less likely to eat in a restaurant due to social distancing requirements and higher risks for infection indoors. Instead, they are eating at home or ordering take out. At end of Q2 2020, reportedly there were 26,160 restaurant closures on Yelp and of these 60% were permanent.
This trend is clearly a benefit for consumer staples companies but to a certain degree it benefits larger restaurant chains in the consumer discretionary sector that have the financial strength to weather the storm and have delivery or drive thru. Outdoor dining combined with delivery allowed many small restaurants to survive during the warm months. But it is unlikely that consumers will simply resume eating indoors especially with COVID-19 infection cases rising again. This has benefitted consumer staples companies and increased their valuations.
Consumers are also changing how they travel and vacation. Gone are flights to resorts or cruises. Rather, many are staying local and often enjoying the outdoors. While travel and leisure may recover with time, it is likely that a lot depends on a successful vaccine that is broadly distributed. Consumers have also increased purchases for home electronics, home entertainment, home project, and gardening spending. This has driven the rise of certain consumer discretionary stocks and materials stocks.
Lastly, the surge of online ordering has led to a rise in the valuation of fintech stocks. Many are trading well over 30X earnings. This will likely be temporary. But still, electronic payment is rapidly replacing cash even before COVID-19. The pandemic only accelerated existing trends.
The Market Has Changed Since Where Work Has Changed
One rapid transition was where and how people work. Those that can are working remotely. I believe that some of these changes are long-term. Several companies have come out and stated that employees can work from home long-term. The list includes many tech companies but others as well. Obviously not all companies can do so, and some may revert back to in office work or follow a hybrid model. But remote working has driven demand for technology and communications leading to higher valuations.
Has the Market Changed Some Sectors Permanently?
On the other hand, travel has declined for commuting, vacation, and business. In my opinion it is likely that this is a long-term trend that will negatively impact the energy sector longer into the future than expected. The biggest demand driver for oil and oil products is cars, airplanes, trains, ships, etc. The lower demand has in turn lowered valuations of energy companies. Additionally, there is an ongoing shakeout in the industry as companies with weak financial positions cease operations or have their assets acquired.
Similarly, less need and use of office space and retail space has hit commercial real estate, possibly permanently. Retailers and small business and rapidly closing stores to adjust to a consumer who is increasingly ordering online. Larger businesses are reducing office space to adjust for employees that are working from home.
The impact of COVID-19 also extends to utilities which are seeing less demand for electricity and gas as office space and retail space is used less. Utilities can adjust for now but eventually demand will pick up whether at business or at home.
The last sector that is seemingly being priced lower is financials. This has to do more with interest rates being at historical lows. The expectation is that this will be for many years.
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Dividend Increases and Reinstatements
Ethan Allen Interiors (ETH) raised the dividend by a whopping 19% to $0.25 per share from $0.21 per share. Ethan Allen suspended the dividend for one quarter. The current yield is ~6%.
MDU Resources (MDU) increased the dividend 2.4% to $0.2125 per share from $0.2075 per share. This is the 30thconsecutive increase., MDU Resources has paid uninterrupted dividends for 83 years straight. MDU Resources is a Dividend Champion.
RLI Corp (RLI) announced a special dividend of $1.00 per share.
Automatic Data Processing (ADP) hiked the dividend 2.2% to $0.93 per share from $0.91 per share. This is the 46thannual increase in a row. ADP is Dividend Aristocrat.
Coronavirus Dividend Cuts and Suspensions List
I updated my coronavirus dividend cuts and suspensions list this past Wednesday. The number of companies on the list has risen to 456. We are well 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.
Two new companies were added to the list in the past week. These were Computer Programs and Systems (CPSI) and Delek US Holdings (DK).
I included eight companies that I had previously missed. The eight companies that I previously missed were Evolution Petroleum (EPM), BlackRock Capital Investment (BKCC), FS KKR Capital (FSK), CVR Energy (CVI), CVR Partners LP (UAN), Marriott Vacations Worldwide (VAC), Brightsphere Investment Group (BSIG), and Newmark Group (NMRK).
Dow Jones Industrial Averages (DJIA): 29,480 (+4.08%)
NASDAQ: 11,829 (-0.56%)
S&P 500: 3,585 (+2.15%)
The S&P 500 is trading at a price-to-earnings ratio of 36.1X and the Schiller P/E Ratio is at about 32.7X. These two metrics are now up for two weeks in a row. 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 overvalued at this point. I personally view anything over 30X as overvalued.
S&P 500 PE Ratio
Shiller PE Ratio
Stock Market Volatility – CBOE VIX
The CBOE VIX measuring volatility declined by 1.76 points to 23.10 at end of this past week. This VIX had spiked to ~38 two weeks ago and has since then trended down. The VIX still remains elevated relative to the long-term average. The long-term average is approximately 19 to 20.
Fear & Greed Index
I also track the Fear & Greed Index. There are seven indicators in the index. They are Put and Call Options, Junk Bond Demand, Market Momentum, Market Volatility, Stock Price Strength, Stock Price Breadth, and Safe Haven Demand.
The Fear & Greed Index is signaling Greed in the market at a value of 59 after two weeks of indicating Fear. This is up from the recent low of 29 two weeks ago, which was the lowest since the market route during the depths of coronavirus pandemic.
Both Market Momentum and Put and Call Options are now signaling Extreme Greed. The upward trend in the market the past two weeks has placed the S&P 500’s 125-day moving average 8.80% above. Put option volume is 58.77% below Call option volume, which is near the lowest level in the past two years.
Junk Bond Demand is indicating Greed. Investors are only accepting 2.14% in yield over investment grade corporate bonds.
Stock Price Breadth, Market Volatility, and Safe Haven Demand are all signaling Neutral. Market breadth is improving as 12.11% more volume in advancing issues compared to declining issues. The VIX is at neutral. Stocks have outperformed bonds by 4.11% during the last 20 trading days.
Stock Price Strength is indicating Extreme Fear. The number of stocks attaining 52-week highs is still greater than those hitting 52-week lows. But it is at the lower end of the range.
The number of weekly new unemployment claims were down with last week at 709,000. This is down 48,000 from last week’s revised numbers. We are now below 800,000 claims consistently. But for some perspective, one-year ago weekly unemployment claims were only about 222,000. Currently we are 3X – 4X the normal level. The seasonally adjusted insured unemployment rate was 5.0%.
The ten states with the highest unemployment rates were Hawaii (9.9), California (8.9), New Mexico (8.5), Nevada (8.2), the Virgin Islands (7.1), Massachusetts (7.0), Puerto Rico (6.9), Georgia (6.8), District of Columbia (6.5), and Alaska (6.1) .
The Bureau of Labor Statistics Job Openings and Labor Turnover Survey (JOLTS) showed job openings were up slightly to 6.4 million on the last day of September. The job openings rate was unchanged at 4.3% while the layoffs rate fell to 0.9% from 1.1% in August. This is similar to September. The Bureau of Labor Statistics reported a 7.9% unemployment rate as of September, or about 12.6 million in the U.S.
The Department of Energy’s Short-Term Energy Outlook expects retail sales of electricity to the commercial sector to fall by 6.4% in 2020 due to the closure of many businesses and the impact of COVD-19. Consumption of electricity in the United States is forecasted to decrease by 3.6% in 2020.
The Labor Department reported that the producer price index for final demand increased by a seasonally adjusted 0.3% in October after increasing 0.4 % in September. Nearly 60% of the rise was due to 0.5% increase in prices for final demand goods, while 40% was due to transportation and warehousing services, which increased 1.1%. Producer prices increased 2.4% due to a spike in fresh and dry vegetable prices. Energy costs climbed by 0.8%, the most in 3 months, reflecting higher gasoline prices.
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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.