Markets Go Down and Markets Go Up – Dividend Power Week In Review

Markets Go Down and Markets Go Up

Markets go down and markets go up. The U.S. stock market and indices continue to trend up but with periodic swings down. Remember the short squeeze in January. We just finished another dip, and it was a good buying opportunity in my opinion, more on that below. Quite a few dividend growth stocks were in correction territory as investors are rotating out of consumer staples and basic necessity stocks into more cyclical industries and the fears of rising inflation and interest rates set in. A few go-go tech stocks were also down in correction or even bear market territory as investors likely took money off the table on valuation concerns. But that said, many of these equities bounced back recovering some of their losses. Markets go down and markets go up, but seemingly the ever-optimistic U.S. retail investor continues to be a driving force for rising markets over time and continues to invest.

Why the Optimism?

If the headlines are any indication, there is a lot of optimism right now about the economy and stock market surrounding rising vaccine distribution and lifting of local and state government restrictions. There is certainly pent-up demand for travel and restaurants. The Dow Jones 30 cleared 30,0000 only a few months ago and is now over 32,000. Remember the book Dow 36,000, more on that below. The NASDAQ-100 (QQQ) and the S&P 500 (SPY) are trading just below their record high. Furthermore, a $1.9 trillion stimulus was just passed by the House and Senate and then signed into the law by the President. You can argue about the merits of the bill, but it is reportedly popular with 61% of Americans supporting it and certain policies in the bill receiving 75%+ support.

There is up to $1,400 for individuals and families that qualify. Where is that money going? I don’t think it is going to be all spent. I think some of the money will go towards catching up on rent, mortgages, and other bills, some money will go into savings accounts to build emergency funds, but some money will also be invested in equities and other investable assets.

But like many info commercials…we are not done, there is more. There is also optimism about the possibility of a large infrastructure bill that is in the middle of negotiations. If headlines are any indication it is likely that the bill will be nearly $2 trillion for spending on roads, bridges, water lines, rail, etc. Most infrastructure spending is local, but it will lead to higher revenue and earnings for companies that focus on these markets.

Remember Dow 36,000?

As an aside, for those of you that are old enough you may recall the book “Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market”, by James K. Glassman & Kevin A. Hassett”. The book was published in 1999 just before the dot-com bust. The authors argued that the Dow would rise to that value in three to five years. Instead, the Dow 30 fell below 7,000 at one point and it took about 20 years for the Dow to go over 30,000. Markets go down and markets go up, but it may take some time.

The book and the authors faced a firestorm of criticism. The authors made the assumption that bonds and stocks were equally risky over the long periods of time. However, this assumption flies in the face of the fundamental tenet of modern finance theory that higher rewards require greater risk. Stocks and bonds are inherently different. Bonds are essentially a contract that specifies how the company must pay the principal and interest. Stocks let you own part of the company and you benefit from a rising stock price and growing dividend stream if the company grows the top and bottom lines. But it also exposes you to the risks of companies that are not growing revenue and earnings with potentially falling stock prices. Your initial principal is at risk and thus it is always good to manage the downside.

Some may argue that there are stretches of time where stocks are not too volatile but have high returns. That is true, but markets go down and markets go up and it ignores that fact that stocks can be volatile when you need the money invested in equities. Imagine that you are retiree who was nearly 100% equities before the dot-com crash of the sub-prime mortgage crisis. Your retirement is pushed off for at least a few years. It is much better to invest smartly.

Final Thoughts on Markets Go Down and Market Go Up

When markets go down it is invariably a time to do more research and add to positions if appropriate since stock markets will generally bounce back and go up although the timing is uncertain. I used the most recent dip to add to McCormick (MKC), the market leader in spices that was coming off a recent split. I have also added to Amgen (AMGN) and Consolidated Edison (ED), which should benefit as NYC reopens. Lastly, I finally took a position in Costco Wholesale (COST), which is down roughly -20% from its peak in late-November 2020. Costco was a large beneficiary of the COVID-19 pandemic and eat at home trend, but sales growth is slowing. I view that as temporary, I mean are you going to stop shopping at Costco?

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Chart or Table of the Week

Another consumer staples and basic necessities stock that has not done well in 2021 is Colgate-Palmolive (CL). Colgate-Palmolive is a consumer product powerhouse in oral care, skin care, house care, and pet nutrition. The company is a Dividend King and just raised the dividend for the 58th straight year. The yield is about 2.4%. The stock rarely trades cheaply due to predictable and steady sales and earnings. Colgate just finished a solid 2020 and is generating organic sales growth. The screenshot below is from Stock Rover* and shows the dividend growth and special dividend.

Dividend Increases and Reinstatements

Wheaton Precious Metal (WPM) hiked the dividend 8.3% to $0.13 from $0.12 per share quarterly. The forward yield is 1.36%. This is the 5^th consecutive annual increase. Wheaton is a Dividend Challenger.

Colgate-Palmolive (CL) raised the dividend 2.3% to $0.45 from $0.44 per share quarterly. The forward yield is 2.4%. This is the 58^th straight annual increase. Colgate-Palmolive is a Dividend King and Dividend Aristocrat.

TE Connectivity Ltd. (TEL) increased the dividend 4.2% to $0.50 from $0.48 per share quarterly. The forward yield is 1.5%. This is the 8^th yearly increase in a row. TE Connectivity is a Dividend Challenger.

Kadant (KAI) hiked the dividend 4.2% to $0.25 from $0.24 per share quarterly. The forward yield is 0.6%. This is the 7^th yearly increase in a row. Kadant is a Dividend Challenger.

Hill-Rom (HRC) raised the dividend 9.1% to $0.24 from $0.22 per share quarterly. The forward yield is 0.9%. This is the 10^th consecutive annual increase. Hill-Rom is a Dividend Contender.

Oracle (ORCL) increased the dividend 33.3% to $0.32 from $0.24 per share quarterly. The forward yield is 1.8%. This is the 8^th yearly increase in a row. Oracle is a Dividend Challenger.

Dick’s Sporting Goods (DKS) hiked the dividend 16% to $0.3625 from $0.3125 per share quarterly. The forward yield is 2.0%. This is the 7^th yearly increase in a row. Dick’s Sporting Goods is a Dividend Challenger.

Dividend Cuts and Suspensions List

I updated my dividend cuts and suspensions list at end of February. The number of companies on the list has risen to 518. We are well over 10% of companies that pay dividends having cut or suspended them since the start of the COVID-19 pandemic.

The following companies were added to the list this past month (February 2020): JD Bancshares (JDVB), Pzena Investment Management (PZN), DHT Holdings (DHT), Healthpeak Properties (PEAK), Corby Spirit and Wine (CBYDF), Antero Midstream (AM), and Danone S.A. ADR (DANOY).

Market Indices

Dow Jones Industrial Averages (DJIA): 32,777 (+4.07%)

NASDAQ: 13,320 (+3.09%)

S&P 500: 3,943 (+2.63%)

Market Valuation – Stock Markets Go Down and Stock Market Go Up

The S&P 500 is trading at a price-to-earnings ratio of 40.2X and the Schiller P/E Ratio is at about 35.5X. These two metrics up in the past week. Note that the long-term means of these two ratios are 15.9X and 16.8X, respectively. 

I continue to believe that the market is overvalued at this point. I personally view anything over 30X as overvalued based on historical data. Note that we are near 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 again fell more than three full percentage points this past week to 20.7. The long-term average is approximately 19 to 20.

Fear & Greed Index

I also track the Fear & Greed Index. The index is now in Neutral at a value of 51. This is up about 3 points this past 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.

Junk Bond Demand is indicating Extreme Greed. Investors are accepting 2.05% yield over investment grade corporate bonds. The spread is down further from recent levels indicating that investors are taking on more risk.

Stock Price Strength is signaling Greed. The number of stocks hitting 52-week highs compared to those hitting 52-week lows is at the upper end of its range.

Safe Haven Demand is in Greed. Stocks have outperformed bonds by 4.44% over the past 20 trading days. This is close to the strongest performance over the past 2-years.

Market Momentum is indicating Greed. The S&P 500 is 8.26% over its 125-day average. This is above the average over the past 2-years.

Stock Price Breadth is indicating Neutral as advancing volume is 15.71% more than declining volume on the NYSE. This is middle of its range over the past two years and the indicator is rising.

Market Volatility is set at Neutral. The CBOE VIX reading of 20.67 is a neutral reading.

Put and Call Options are signaling Extreme Fear. In the last five trading days, put option volume has lagged call option volume by 51.87%. This is amongst the highest level of put buying in the past two years.

Economic News

The Federal Reserve Bank of New York’s Survey of Consumer Expectations showed consumers’ median year-ahead inflation expectations rising to 3.1% from 3.0%. This is the highest reading since July 2014. The survey shows consumers are gearing up as they expect to spend significantly more on gas, rent, and other essentials over the next year.

The U.S. Bureau of Labor Statistics reported the Consumer Price Index for All Urban Consumers (CPI-U) increased a seasonally adjusted 0.4% in February, after a 0.3% rise in January. The gasoline index accounting for over half of the seasonally adjusted increase in the all items, rising 6.4% in February. The index for fresh fruits increased 1.8%, the largest increase in that index since March 2014. The all items index rose 1.7% for the 12 months ending February, after a 1.4% rise in January. While indexes for shelter (+0.2%), recreation (+0.6%), and medical care (+0.3%) all increased, indexes for airline fares (-5.1%), apparel (-0.7%), and used vehicles (-0.9%) declined.

The Department of Labor’s Job Openings and Labor Turnover Survey, or JOLTS reported job openings increased in January by 165,000 to roughly 6.9 million. The job openings rate increased to 4.6% from December’s 4.5%. Most of the gains came from services and retail. Hires declined to 5.3 million in January, down from 5.4 million in December, and 6.1 million in November. The hiring rate is now at 3.7%, down from 3.8%. Layoffs decreased slightly to 1.7 million from 1.8 million in December, lowering the layoffs rate to 1.2% from December’s 1.3%. There were about 10.1 million unemployed workers vying for 6.9 million job openings or about 1.5 unemployed workers for every job opening.

Thanks for reading Markets Go Down and Markets Go Up – Dividend Power Week in Review!

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Here are my recommendations:

If you are unsure on how to invest in dividend stocks or are just getting started with dividend investing. Take a look at my Review of the Simply Investing Report. I also provide a Review of the Simply Investing Course. Note that I am an affiliate of Simply Investing.

If you are interested in an excellent resource for DIY dividend growth investors. I suggest reading my Review of The Sure Dividend Newsletter. Note that I am an affiliate of Sure Dividend.

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