Investing Lessons from COVID-19
Investing Lessons from COVID-19. It has been a little over a year since my kids started virtual learning at school. In-person school has restarted but we kept our kids at home mostly because there are only a few months left in school and they are not yet vaccinated. It has also been about a year since the markets plunged and some people panicked. The nadir of the market was about the third week of March 2020. The drop in stock prices was sudden and steep but the recovery was just as steep. For context, the major markets were down as much as -41% in the case of the Russell 2000, -35% in the case of the Dow Jones 30, -30% for the S&P 500, and almost -20% for the Nasdaq-100. But the combination of massive federal stimulus and investors with seemingly less to do at home caused the markets to bounce back just as rapidly as they declined. So, with that in mind, it is now a good time to discuss some investing lessons from COVID-19.
Black Swan Events are Unpredictable
A Black Swan event by definition is one that occurs only so often. They are unpredictable but tend to have a large impact on economies and stock markets. The term was popularized by Nasim Taleb in his book “The Black Swan: The Impact Of The Highly Improbable.” The COVID-19 pandemic was a Black Swan event. Pandemics have about a 1 in 100 to 1 in 200 chance of occurring, which is rare. By their very nature pandemics have a global effect on economies and thus markets. In many cases Black Swan events were making some stocks a bargain.
There is another Black Swan event occurring right now in the Suez Canal as one of the largest container ships in the world is stuck almost sideways in the canal. This has caused shipping rates to skyrocket and is hindering delivery of materials, and goods needed by manufacturers and other businesses around the world. In any case, the main point here is that standard probability and statistics do not work in predicting Black Swan events. Most if not all market prognosticators did not predict COVID-19 and the results or the fact that a ship would be stuck in the Suez Canal. However, Black Swan events are real and will adversely affect markets and investors.
Some Companies Benefitted from COVID-19 and Others Struggled
Although almost all stocks plunged during the market downturn not all companies suffered equally during the pandemic. Indeed, some companies outright prospered and their stocks bounced back the fastest and powered higher. Many tech, online entertainment, and delivery companies thrived during the pandemic as consumers and businesses emphasized their online business. Companies like Microsoft (MSFT), Amazon (AMZN), Netflix (NFLX), United Parcel Service (UPS), Zoom (ZM), and many others have done very well. This is not surprising. But even companies not focused on tech, delivery, or online did well. For instance, most grocery stores and consumer staples companies saw record growth in revenue and earnings. Consumers redirected dollars from eating in restaurants, traveling, theaters, sports venues, etc. to eating and entertaining at home.
Investing Lessons from COVID-19 – This Recession Was Different
This recession was driven by a health crisis as opposed to an economic or financial crisis. This was unlike the sub-prime mortgage crisis, which resulted in a slowly evolving recession that took years to bounce back. The bounce back after the global economic downturn during COVID-19 was as rapid and steep as the downturn. Health crises seemingly require a two-pronged approach, one dealing with health and one dealing with financial challenges. When state and local government restrictions were lifted economic activity returned.
Dividend Quality and Safety Matters – Investing Lessons from COVID-19
Many companies cut or suspended their dividend. Dividend Power provided weekly tracking of these cuts and suspensions. The number and dollar value of dividend cuts and suspensions was higher than the sub-prime mortgage crisis or the dotcom bust. The rate of cuts during Q2 and Q3 2020 was unprecedented as companies suffered from large drops in revenue, earnings, and cash flow. However, on a personal basis I had only one dividend cut or suspension due to my focus on quality. Dividend safety and the balance sheet matters during times of crisis.
Doing Nothing May Have Been the Best Approach
Overall, doing nothing may have been the best approach during the short-lived recession and stock market downturn. Those that continued to save and stayed invested are now ahead of where they were in March 2020. On the other hand, those that panicked and pulled out of the stock market likely missed the opportune time to get back into stocks. Granted, it was difficult to stay invested when some companies were reporting double-digit drops in demand and revenue. Your risk tolerance may have been tested. There are those who try to buy low and sell high, but timing exits and entries into the stock market is difficult and those that stayed invested did well. The real question though, did you add to your existing positions or buy when there was blood on the street. Many stocks rose off their lows and went much higher. Even staid dividend growth stocks are trading as much 100% more than before the pandemic.
Final Thoughts on Investing Lessons from COVID-19
Investing lessons from the COVID-19 pandemic are just that lessons to be learned from. They may not apply for the next recession but then again, they might. However, it is clear that not panicking and staying invested worked in this most recent recession.
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Chart or Table of the Week
Today I highlight Bristol-Myers Squib (BMY). The company is one of the largest pharma companies in the U.S. with a market capitalization of over $140 billion. The company is a leader in immune-oncology that the company reinforces with acquisitions. BMY acquired Celegene and Medarex. Top sellers include ELIQUIS, REVLIMID, OPDIVO, and ORENCIA. The stock is a Dividend Contenders with 14 years of consecutive dividend growth. Right now, many large-cap pharma stocks are trailing the market due to concerns about patent expirations and generic competition. The stock is yielding over 3% and the payout ratio is a very conservative 28%. The screenshot below is from Stock Rover* and is from a part of the Summary screen for BMY.
Dividend Increases and Reinstatements
Worthington Industries (WOR) raised the dividend 12.0% to $0.28 from $0.25 per share quarterly. This is the 10thconsecutive annual increase. Worthington is a Dividend Contender.
Darden Restaurants (DRI) increased the quarterly dividend by 137.8% to $0.88 per share, the same level as before the COVID-19 suspension last year.
Movado (MOV) declares $0.20/share quarterly dividend, 100% increase from prior dividend of $0.10.
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).
Dow Jones Industrial Averages (DJIA): 33,072 (+1.36%)
NASDAQ: 13,139 (-0.58%)
S&P 500: 3,975 (+1.58%)
Market Valuation – Investing Lessons from COVID-19
The S&P 500 is trading at a price-to-earnings ratio of 40.5X and the Schiller P/E Ratio is at about 35.8X. These two metrics down 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 was flat this past week 18.86. The long-term average is approximately 19 to 20. This is the first time since the pandemic started that the CBOE VIX went below the long-term average.
Fear & Greed Index
I also track the Fear & Greed Index. The index is now in Neutral at a value of 52. This is down 1 point 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.
Safe Haven Demand is in Extreme Greed. Stocks have outperformed bonds by 6.28% over the past 20 trading days. This is close to the strongest performance over the past 2-years as investor rotoate back into stocks after a period of weakness.
Market Momentum is indicating Greed. The S&P 500 is 6.75% over its 125-day average. This is above the average over the past 2-years.
Market Volatility is set at Neutral. The CBOE VIX reading of 18.86 is a neutral reading.
Stock Price Strength is signaling Fear. 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 advancing volume is 3.03% more than declining volume on the NYSE. This is at the lower end of its range over the past two years and the indicator is rising.
Put and Call Options are signaling Extreme Fear. In the last five trading days, put option volume has lagged call option volume by 46.47%. This is amongst the highest level of put buying in the past two years.
The U.S. Census Bureau reported that sales of newly built homes fell 18.2% below the revised January rate of 948,000 to a seasonally adjusted annual rate of 775,000, this is the slowest pace since May 2020. New home sales fell in every region of the country; Northeast (-11.6%), Midwest (-37.5%), South (-14.7%), and West (-16.4%). Weather especially impacted the Midwest and South. The median sales price of new houses sold in February 2021 is up 5.3% year over year to $349,400.
The Commerce Department reported new orders for durable goods fell 1.1.% (-$2.9B) in February, this follows a 3.5% increase in January and is the first decrease since last spring. Manufacturers were challenged with supply change disruptions caused by severe weather and commodity shortages. Semiconductor shortages not only pushed up prices but caused some delays in the manufacturing of autos and other goods. Transportation led the decrease down 1.6% (-$1.3B), this follows five consecutive monthly increases. Automakers reported the biggest drop in orders — a decline of 8.7%.
The Department of Labor reported for the week ending March 20, that initial jobless claims came in at 684,000, a decrease of 97,000 from the previous week’s revised level of 781,000 and the lowest level since March 2020. The 4-week moving average was 736,000, a decrease of 13,000 from the previous week’s revised average of 749,000. Some states did however see a spike in initial claims. Continuing claims for Pandemic Emergency Unemployment Compensation – a program for those who have exhausted state benefits rose to 5.55M for the week ended March 6.
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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.