The Stock Market’s Wild Ride
The stock market’s wild ride this past week has been something to watch. Much like the Disney ride Mr. Toad’s Wild Ride the stock market zigzagged around with no general direction. In this case it was driven by news of earnings, vaccines, economic data, fear of missing out, and mostly the short squeeze on heavily shorted stocks especially GameStop (GME) and a few others. More on that later.
Volatility is Up – The Stock Market’s Wild Ride
Volatility as measured by the CBOE VIX is up roughly 50% to 33.09 at end of the week as opposed to 21.09 at end of last week. It spiked over 60% at its peak in a very short time period. The VIX measures expected volatility based on S&P 500 options contracts. It is often referred to as the “fear gauge” and acts as a measure of investor perception of risk. The VIX jumped as the S&P 500 sold off the most since October 2020. Still, it is lower than that time and certainly lower than when it spiked to over 80 when the coronavirus pandemic started to spread in March 2020. So, the sky is not yet falling.
Simultaneously, the Fear & Greed Index has swung to fear for the first time in many weeks with a reading of 35. The CBOE VIX is one the seven components of the Fear & Greed Index and is in Extreme Fear. Two other components swung to Extreme Fear as put option volume surged and returns of stocks lagged relative to bonds indicating that investors were seeking safety. To put this in perspective though, this is still much better than the essentially zero readings we had during March 2020.
Short Squeeze and The Stock Market’s Wild Ride
There was a crowd sourcing revolution of sorts this past week. Thousands if not millions of retail investors started to buy stock and options of heavily shorted stocks, especially GameStop. Hedge funds that were short these stocks were arguably caught flat footed as they had to buy shares at elevated prices to cover their short positions. In turn, their buying probably contributed to prices further going up. Hedge Funds that were short are sitting on estimated losses of nearly $71 billion this year.
The main organizing force for this was the Wall Street Bets forum on Reddit. The prevailing argument was that this done to punish hedge funds on Wall Street. However, it is clear that some retail investors were making a tidy profit on the trade and others piled in. The fear of missing out can be a powerful driving force. Restrictions on trading these stocks at some brokerages resulted in a large decline and then removal of those restrictions caused their gain again.
Despite the interest in these heavily shorted stocks, their business prospects are not good. Hence, they were heavily shorted. For instance, GameStop has been faced with declining revenue and earnings for years, as video gaming moves online. The company had sales of $9.6 billion in 2012 and $5.2 billion in the TTM. Earnings have been negative for the past two years. Total debt has been trending up. Interest coverage was negative and the leverage ratio over 6X in the last quarter. Clearly, not a stock that I would like to own, especially if you believe that revenue and earnings growth should drive stock prices and dividend growth.
What to do About the Stock Market’s Wild Ride?
What should you do about the stock market’s wild ride? I would argue nothing for stocks with spiking stock prices. I am certainly not going buy GameStop after nearly a 400% price return in the past week and an over 7,700% price return in the past year. If you are managing the downside and investing for the long-term then 1-week of volatility should not affect you.
However, the short squeeze did arguably affect the broader market. The S&P 500 and Dow Jones 30 are down year-to-date. The Dow 30 fell below 30,000. Hedge funds covering short positions may have needed to sell shares in long positions. On a year-to-date basis some dividend growth stocks are in correction territory. As I have said before, being contrarian is hard but it may be a good time to buy. Since 1945, there have 23 corrections and 13 bear markets. So, market declines of -10% or more are normal. The average correction lasts five months.
If I take a quick look on Stock Rover* at the highest percent losers on a year-to-date basis in the Dividend Kings, Coca-Cola (KO) is down -12.2% and Nordson (NDSN) is down -10.9%.
In the Dividend Champions, Brady (BRC) is down -12.7%, W.W. Grainger (GWW) is down -10.8%, Jack Henry & Associates (JKHY) is down -10.6%, VF (VFC) is down -10.0%, and Cintas (CTAS) is down -10.0%.
In the Dividend Contenders, Aaron’s is down -10.7%, Heico (HEI) is down -11.0%, Visa is down -11.6%, Cohen & Steers (CNS) is down -11.8%, Emclaire Financial (EMCF) is down -12.6%, Apartment Investment (AIV) is down -13.1%, and Ritchie Bros Auctioneers (RBA) is down -15.3%
In the Dividend Challengers, Mastercard (MA) is down -11.3%, MSCI (MSCI) is down -11.5%, and several others are down over -10% as well.
Not all these stocks are worth owning, but some are at least over the long-term. I have personally added to Visa and Mastercard. Both stocks will likely face a tough Q1 2021 due to the surge in COVID-19 new infections. I view both of these names as long-term dividend growth stocks. You can read about Visa in Dividend Power’s e-book as well as nine other long-term dividend growth stocks. Both Visa and Mastercard should do OK over time as vaccine distribution scales and business returns to normal. The move towards electronic payments during the COVID-19 pandemic is only accelerating and both companies should benefit. Of course, the timing is uncertain and you may want to wait for bigger margin of safety.
I don’t own MSCI, but you can read the recent article on my blog. Cintas is a stock that I wished I bought during the Great Recession. The stock has 1210% total return in the past decade. Not bad for a company the provides uniforms and other services to businesses. However, with the low yield I am not diving in now. Coca-Cola (KO) has had a rough time during the pandemic, but despite the drop in stock price I will wait until the yield goes over 3.5% to add shares.
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Dividend Increases and Reinstatements
Delek Logistics Partners (DKL) hiked the dividend 0.6% to $0.91 per share quarterly. The forward yield is now 9.5%. This is the 8th consecutive annual increase. Delek is a Dividend Challenger.
Kimberly-Clarke (KMB) increased the dividend 6.5% to $1.14 quarterly. The forward yield is now 3.5%. This is 49thannual increase in a row. Kimberly-Clarke is a Dividend Aristocrat and Dividend Champion.
Archer-Daniels-Midland (ADM) raised the dividend 2.8% to $0.37 per share quarterly. The forward yield is no 2.8%. The company has paid a dividend for 89 years in a row. This is the 27th consecutive annual increase. ADM is a Dividend Aristocrat and Dividend Champion.
S&P Global (SPGI) hiked the dividend 15% to $0.77 per share quarterly. The forward yield is now 1.0%. The company has paid a dividend since 1937. This is the 48th annual increase in a row. S&P Global is a Dividend Aristocrat and Dividend Champion.
John B. Sanfilippo & Son (JBSS) will pay a special dividend of $2.50 per share on March 16, 2021 to stockholders of record as of the close of business on February 26, 2021.
California Water Service (CWT) raised the dividend 8.2% to $0.23 per share quarterly. The forward yield is now 1.7%. This the 54th yearly increase in a row. California Water Service is a Dividend King.
Arthur J. Gallagher (AJG) increased the dividend 6.7% to $0.48 per share quarterly. The forward yield is now 1.7%. This is the 7th consecutive annual increase. Arthur J. Gallagher is a Dividend Challenger.
Tractor Supply Company (TSCO) hiked the dividend a whopping 30% to $0.52 per share quarterly. The forward yield is now 1.4%. This is the 10th straight increase in a row. Tractor Supply is a Dividend Contender.
Air Products and Chemical (APD) increased the dividend 11.9% to $1.50 per share quarterly. The forward yield is no 2.2%. This is the 39th yearly increase in a row. Air Products is a Dividend Aristocrat and Dividend Champion.
L3Harris Technologies (LHX) raised the dividend 20% to $1.02 quarterly. The forward yield is no 2.3%. This the 19thstraight increase in a row. L3Harris is a Dividend Contender.
Polaris (PII) increased the dividend 1.6% to $0.63 per share quarterly. The forward yield is now 2.1%. This is the 26thannual increase in a row. Polaris is a Dividend Aristocrat and Dividend Champion.
Dividend Cuts and Suspensions List
I updated my dividend cuts and suspensions list two weeks ago. The number of companies on the list has risen to 511. We are well over 10% of companies that pay dividends having cut or suspended them since the start of the COVID-19 pandemic.
No new companies were added to the list in the past week.
No missed companies were added to the list.
Dow Jones Industrial Averages (DJIA): 29,981 (-3.28%)
NASDAQ: 13,071 (-3.49%)
S&P 500: 3,714 (-3.32%)
The S&P 500 is trading at a price-to-earnings ratio of 38.8X and the Schiller P/E Ratio is at about 33.8X. These two metrics are down about one point this past week. Note that the long-term means 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. Note that we are starting to approach 40X and valuation levels near the top of the dot-com era.
S&P 500 PE Ratio
Shiller PE Ratio
Stock Market Volatility – CBOE VIX
The CBOE VIX measuring volatility went up this past week by almost 50% 33.09%. This is the highest level since October 2020. The long-term average is approximately 19 to 20. So, at this point we are just above the long-term average and trending down.
Fear & Greed Index – The Stock Market’s Wild Ride
I also track the Fear & Greed Index. The index is now in Fear at a value of 35, down 34 points from last week.
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.
Stock Price Strength is signaling Extreme Greed. The number of stocks hitting 52-week highs compared to those hitting 52-week lows is at the upper end of its range.
Stock Price Breadth is indicating Neutral as the declining volume is 1.55% more than advancing volume on the NYSE. This is middle of its range over the past two years.
Market Momentum is indicating Neutral. The S&P 500 is 5.17% over its 125-day average. This is on the higher end over the past two years.
Junk Bond Demand is indicating Fear. Investors are accepting 2.19% yield over investment grade corporate bonds. This is historically low but is elevated compared to recent levels.
Safe Haven Demand is in Extreme Fear. Stocks and bonds have had similar returns over the past 20 days. This amongst the weakest relative returns for stocks over the past 2-years.
Put and Call Options are signaling Extreme Fear. Volume of put options lagged volume in call options by 51.87%. This amongst the highest level of put option volumes over the past 2-years.
Market Volatility is set at Neutral. The CBOE VIX reading of 33.09 is an extreme fear reading.
The number of weekly new unemployment claims were up with last week at 847,000. This is up 67,000 from last week’s revised numbers. The 4-week moving average has been consistently above 800,000 for several weeks.
For some perspective, one-year ago weekly unemployment claims were only about 212,000. Currently we are 3X – 4X the normal level. The seasonally adjusted insured unemployment rate was 3.7%.
The ten states with the highest unemployment rates were Kansas (7.7), Pennsylvania (7.0), the Virgin Islands (6.9), Alaska (6.4), Nevada (6.1), Michigan (5.6), Puerto Rico (5.6), Illinois (5.5), New Mexico (5.5), and Connecticut (5.4).
The U.S Census Bureau reported that new orders for durable goods increased 0.2% to a seasonally adjusted $245.3 billion in December. Up for the eighth consecutive month, the figures follow an upwardly revised 1.2% increase in November. New orders for transportation equipment fell 1% as orders related to commercial aircraft dropped after spiking 1.9% in November. Core capital goods orders which exclude aircraft and military hardware increased 0.6% in December to $71.8 billion, following a 1% increase in November. Excluding transportation, overall orders were up 0.7%.
The Commerce Department’s first estimate on fourth-quarter gross domestic product (GDP) growth reported the economy expanded at an annual rate of 4.0%. Increases in exports, nonresidential fixed investment, consumer spending, residential investment, and inventories contributed positively, while declines in government spending at the federal, state, and local levels held back the economy. Personal consumption increased at only a 2.5% annualized rate in the fourth quarter as retail sales fell on a month-over-month basis in October, November, and December. Government spending and investment dropped by 1.2%, mainly due to an 8.4% fall in nondefense spending. Full-year GDP declined 3.5% in 2020 and by 2.5% from the fourth quarter of 2019, the first economic contraction since 2009 and the worst since at least the end of 1946.
Thanks for read the Stock Market’s Wild Ride and Dividend Power’s Week in Review!
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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.