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Close to a Bear Market

Close to a Bear Market – Week in Review

Close to a Bear Market

The market continues to be a punishing place to be invested in 2022. The Dow Jones Industrial Average (DJIA) is down for its fifth straight week on concerns about inflation, the US Federal Reserve’s tapering, almost certain interest rate hikes, and Ukraine – Russian War. According to the Consumer Price Index (CPI), inflation came in even higher at about 7.9%, driven by higher energy, food, commodity, and used car prices. We outlined the rising inflation three times in the past 12 months during our week in reviews, most recently at the start of the year. The Fed is almost done tapering and will probably announce a 0.25% interest hike soon. The conflict in Europe shows no sign of abating. It is a volatile time to be an investor and we are getting close to a bear market especially in the tech-heavy Nasdaq.

Close to a Bear Market
Close to a Bear Market

According to StockRover*, the Nasdaq is down (-17.9%) year-to-date (YTD) and is nearing a bear market. The S&P 500 Index is down -11.8% and the Russell 2000 is down -11.7%, and both are in correction markets. The Dow 30 is performing the best at only (-9.3%). The CBOE VIX or volatility index is elevated at about 30. Risk-averse investors are buying gold, bonds, and parking money in cash.

Market Overview
Source: StockRover*

The downward trend in 2022 is more apparent in chart form.

Stock Market Performance
Source: StockRover*

Is it Time to Buy?

Since we are close to a bear market, long-term and even newer investors are probably asking is it time to buy? Of course, a down market often offers the best deals, but it is challenging to be contrarian at times. Indeed, what was smart in 2020 – 2021 has not worked well in 2022.

However, it may be time to invest for investors following a consistent strategy, like dividend growth investing. Corrections and bear market eventually end, although it may take time. The average market correction is approximately (-13.7%) and lasted four months since World War II. A correction occurs about once every two years. Bear markets have been less frequent at about once every nine years since 1974. 

Another argument recently presented by Thomas Lee of Fundstrat argues that the broader stock market declines during the buildup to conflicts but recovers quickly. The chart is making the rounds on investing profiles on Twitter, Wallstreetbets, and Seeking Alpha. Whether it holds true for the current conflict or not is uncertain. It has been many years since a significant conflict in Europe with the potential for escalation. Additionally, inflation is high and is probably challenging to cool down, which may pressure stock prices.

Conflict and Stock Market
Source: Fundstrat and Bloomberg

In addition, we addressed the effect of wars on stocks and returns during a week in a review article at the end of February 2022. Stocks decline at first during a geopolitical conflict to a bottom in about 22 days on average and then recover in about 47 days on average. The maximum drawdown and time to recovery were longer for more significant conflicts. The current strife certainly qualifies as a larger one.

Hence, whether you think it is time to buy depends on your personal view of the market and margin of safety for stocks. There is the possibility the global and US economy will enter a recession. Moreover, the yield curve (see chart below) is getting close to signaling a recession.

Look at the Dividend Kings

In any case, investors know that it is almost impossible to catch the market bottom except in hindsight. However, a dollar-cost averaging (DCA) approach is relatively easy to implement during a declining market. Using a watchlist from StockRover*, we check the YTD returns of the Dividend Kings.

There are a lot of Dividend Kings that are down for the year, and one that stands out is 3M Company (MMM), a perennial favorite of dividend growth investors (long 3M). The stock is close to bear market territory. However, I view the company as one of the best dividend growth stocks, and 3M’s dividend safety has improved. The stock is yielding 4.2%, which does not occur often. The forward price-to-earnings (P/E) ratio is ~12.7X, well below the trailing 5-year and 10-year averages.

Dividend King Returns
Source: StockRover*

StockRover* says 3M is trading below its fair value estimate based on a discounted cash flow (DCF) analysis. Furthermore, Portfolio Insight* indicates that the stock is undervalued based on the P/E ratio, dividend yield and 2022 earnings estimates, and historical trends.

3M Valuation Trends
Source: Portfolio Insight*

Final Thoughts on Close to a Bear

The above exercise can be repeated for the Dividend AristocratsDividend Champions, and Dividend Contenders. Many high-quality stocks are trading in bear market territory. Some are deals, and some are not. For instance, on the Dividend Contenders list, Intuit (INTU), Starbucks (SBUX), Nike (NKE), BlackRock (BLK), Home Depot (HD), and more are in bear market territory. In another example, on the Dividend Aristocrats list, T. Rowe Price (TROW), Ecolab (ECL), Sherwin-William (SHW), and more are in bear market territory.

Some of these stocks were significantly overvalued before the downturn, but now they are trading at more reasonable valuations. However, we may be in for a volatile 2022 and a deeper downturn.


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The Stock of the Week

Today I highlight Sherwin-Williams (SHW). The company is the global leader in coatings. It makes paints for the homes and industrial applications. The company has a network of about 4,800 stores and sells its paints through home improvement and hardware stores. Major brands include Sherwin-Williams, Purdy, Minwax, Krylon, Thompson’s Water Seal, and Dutch Boy. The stock has been overvalued for the past couple of years. However, the recent market downturn has brought the valuation to more reasonable levels. The dividend yield is only 1.03%, but it is greater than the 5-year average and covered by a conservative ~27% payout ratio. The dividend growth rate for the past decade was around 16.3%. The forward P/E is about 24.7X within the average in the past decade. The stock is trading below its 50-day and 200-day moving EMA.

The screenshot below is from Stock Rover*.

Sherwin-Williams Stock Chart
Source: Stock Rover*

Dividend Increases and Reinstatements

Search for a stock in the list of dividend increases and reinstatements. This list is updated weekly. In addition, you can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

The dividend cuts and suspensions list was most recently updated at the end of January 2022. As a result, the number of companies on the list has risen to 543. Thus, well over 10% of companies that pay dividends have cut or suspended them since the start of the COVID-19 pandemic. The list is updated monthly.

One new addition indicated that companies are experiencing solid profits and cash flow in January.

The new addition was Compass Diversified (CODI).

Market Indices

03/12/22

Dow Jones Industrial Averages (DJIA): 32,944 (-1.99%)

NASDAQ: 12,844 (-3.53%)

S&P 500: 4,204 (-2.88%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 23.97X, and the Schiller P/E Ratio is about 34.41X. These two metrics were up in the past week. Note that the long-term means of these two ratios are 16.0X and 16.9X, respectively. 

The market is still overvalued despite the recent market correction. Earnings multiples more than 30X are overvalued based on historical data.

S&P 500 PE Ratio History

SP500 PE Ratio
Source: multpl.com

Shiller PE Ratio History

Shiller PE Ratio
Source: multpl.com

Stock Market Volatility – CBOE VIX

This past week, the CBOE VIX measuring volatility was down 1.25 points to 30.75. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 index options. It is commonly referred to as the fear index.

CBOE VIX
Source: Google

Yield Curve

The two yield curves shown here are the 10-year US Treasury Bond minus the 3-month US Treasury Bill from the NY York Fed and the 10-year US Treasury Bond minus the 2-year US Treasury Bond from the St. Louis Fed.

Inversion of the yield curve has been increasingly viewed as a leading indicator of recessions about two to six quarters ahead, according to the NY Fed. The higher the spread between the two interest rates, the higher the probability of a recession.

10-Year Bond minus 3-Month Bill
Source: NY Fed
10-Year Bond minus 2-Year Bond
Source: St. Louis Fed

Economic News

The US Bureau of Labor Statistics Job Openings and Labor Turnover Survey, or JOLTS, reported 11.26 million job openings as of the last day of January, a decline from December’s revised record high reading. December was adjusted up significantly (+523,000) to 11.45 million openings. Job openings have been reported above the 10 million level for eight consecutive months. Industries contributing to the increase include other services (+136,000) and durable goods manufacturing (+85,000). Job openings decreased in accommodation and food services (-288,000); transportation, warehousing, and utilities (-132,000); and federal government (-60,000).

The US Energy Information Administration reported that US commercial crude oil stockpiles decreased by 1.9M barrels to 411.6M barrels (13% below the five-year average) for the week ending March 4, 2022. Crude oil refinery inputs averaged 15.4M barrels per day, a decrease of 21K barrels per day compared to the previous week’s average. Gasoline inventories decreased by 1.4M barrels (1% above the five-year average), distillate inventories fell by 5.2M (18% below the five-year average). Refineries operated at 89.3% of their operable capacity, as gasoline production increased an average of 9.6M barrels per day. Crude oil imports came in at 6.3M barrels per day, an increase of 600K barrels per day compared to the previous week. Crude oil imports averaged about 6.2M barrels per day over the last four weeks, 10.0% more than the previous year’s same period. Total commercial petroleum inventories decreased by 8.1M barrels last week.

The US Bureau of Labor Statistics reported the consumer price index rose 0.8% in February; this follows a 0.6% increase in January. As a result, the index’s year-on-year rate is up a seasonally adjusted 7.9%, the fastest annual pace since January 1983. Increases were broad-based with the indexes for gasoline (+6.6%), shelter (+0.5%), and food (+1.0%) primary contributors. The gasoline index accounted for almost one-third of the monthly CPI increase, while the food index saw its most significant monthly rise since April 2020. The annual rate of core CPI inflation is 6.4% and is the most significant 12-month change since August 1982.

Thanks for reading Close to a Bear Market – Week in Review!


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