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Worst Start 1939

Worst Start Since 1939 – Week in Review

Worst Start Since 1939

After Amazon (AMZN) stock had its worst single-day since 2006, the S&P 500 Index is off to its worst start since 1939. According to Stock Rover*, Amazon’s stock price fell about (-14%) for the week because of a quarterly loss of $4 billion. However, investors are still up 7.4% in the past 2-years.

AMZN 5-Day Stock Chart
Source: Stock Rover*

In the meantime, the S&P 500 Index is down (-14.7%) year-to-date (YTD). This performance is the worst start since 1939 when the Index was down (-17.3%) in the first four months. The year 1932 was the worst at (-28.2%).

Worst Start 1939
Worst Start Since 1939

All The Indices Are Down

All the indices are down in the first four months. The Nasdaq continues its downward trend and is clearly in a bear market territory. The Nasdaq and the Nasdaq 100 Index have fallen (-21.1%). The small-cap Russell 2000 Index is down (-16.7%), and the Dow Jones Industrial Averages (DJIA) has dropped (9.2%). On the other hand, the Dogs of the Dow 2022 are performing well on a relative basis. The investing strategy is actually up 0.8% YTD.

Index and Sector Returns YTF
Source: Stock Rover*

The Dividend Growth Investing Strategy is Doing Well

The Dividend Kings 2022 have decreased only (-7.4%) YTD. In fact, all dividend growth investing strategies are performing better than the major indices or growth stocks despite the worst start since 1939.

The Dividend Aristocrats in 2022 have dropped 6.0%, making it the best performing of all the dividend growth strategies. The 2022 Dividend Champions are down 6.6%. The Dividend Contenders in 2022 have declined (-7.6%). Lastly, the Dividend Challengers 2022 are the worst-performing (-9.0%).

The chart from Stock Rover* below shows the YTD performance of all the dividend growth investing strategies.

Dividend Growth Strategies YTD Returns
Source: Stock Rover*

Why Is the Stock Market Performing Poorly?

There are three reasons the stock market is performing poorly: rising interest rates, the war in Ukraine, and the resurgence of Covid-19 in China.

Rising Interest Rates

The first reason is the US Federal Reserve has been tapering since October 2021. Tapering means the Fed reduced the dollar amount of US Treasuries and mortgage-backed securities (MBS) that it was buying. This process was rapid, and by March 2022, the Fed had exited the market. This change caused an upward pressure in interest rates.

Next, the Fed increased the Federal Funds Rate by 0.25% in March 2022. This increase was the first since 2018. The Fed is increasingly hawkish and will likely raise rates by at least 0.5% in May 2022.

Lastly, the Fed will reduce its $9 trillion balance sheet at a seemingly aggressive rate.

The bottom line is the Fed is responding to the highest inflation in decades. As a result, they are removing stimulus from the US and global economy. The effect is they are not creating dollars and inflating asset prices. This change immediately impacted liquid and tradeable asset prices, which have declined. Furthermore, it is making debt more expensive which has a more significant impact on growth stocks.

Interest rates have increased dramatically since the start of the year. Moreover, short-term rates have risen severalfold. For example, the 3-month T-bill yielded 0.08% on January 3, 2022, and 0.85% on April 29, 2022.

US Treasury Rates YTD

War in Ukraine

The following reason stocks are off to their worst start since 1939 is the war in Ukraine. This war was arguable a Black Swan event. It was unpredictable, and the duration is unknown. The global media and even expert military analysts predicted a fast outcome. However, the war is now in its third month.

The war is influencing oil and natural gas prices causing spikes and volatility. Much of Europe relied on Russia as a primary supplier of natural gas. Energy costs impact companies’ inputs and eat into consumers’ discretionary budgets. Hence global stock markets are pricing in lower margins and lower profitability.

A Resurgence of COVID-19 in China

The last item affecting stocks is the resurgence of COVID-19 in China. Cases are rising, and some major cities are on lockdown. Some of these cities are major manufacturing centers. Consequently, this action has caused supply chain disruptions for almost every company. In addition, lockdowns have reduced consumer demand leading to lower sales. As a result, there is concern that China may enter a recession, especially since US Treasury yields are now higher China government bond yields. This fact may cause capital outflows as money seeks better returns.

Bonds Are Not a Refuge

When the stock market is volatile or declining many investors move into bonds. However, the iShares 20+ Year Treasury Bond ETF (TLT) was down 19.1% YTD. The iShares Core US Aggregate Bond ETF (AGG) was down 9.4% YTD. Both returns are no better than stock returns.

Only gold seems to be holding value and is up 3.5% YTD.

Final Thoughts on Worse Start Since 1939

There is an argument that risks are mostly priced, and it is a good time to invest. The latest reading on the Fed’s preferred measure of inflation, the Personal Consumption Expenditure (PCE), showed inflation hit a record 6.6% in March 2022 but take out energy and food inflation growth moderated. Whether this is peak inflation or not will be seen in the next few months. Nevertheless, the Fed’s actions may be having the intended effect.

In the meantime, the dividend growth investing strategy has performed relatively well in 2022, and I am personally staying the course.


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The Stock of the Week

Today we highlight the Dividend Kings 2022. Although they are performing relatively well, there are still a few down more than (-20%). In addition, some are yielding more than 4%. When a Dividend King is yielding is 4%+ and is in a bear market territory, it is worth digging a little deeper. The chart below from Stock Rover* shows the YTD returns of all 39 Dividend Kings. The following chart shows the dividend yield from highest to lowest.

Dividend Kings YTD Returns
Source: Stock Rover*
Dividend Kings FWD Dividend Yields
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 April 2022. As a result, the number of companies on the list has risen to 551. 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.

Three new additions indicate companies are experiencing solid profits and cash flow in April.

The new additions were Gouverneur Bancorp (GOVB), Bridge Investment Group (BRDG), and Western Asset Management (WMC).

Market Indices

04/30/22

Dow Jones Industrial Averages (DJIA): 32,977 (-2.47%)

NASDAQ: 12,335 (-3.93%)

S&P 500: 4,132 (-3.27%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 20.9X, and the Schiller P/E Ratio is about 32.5X. 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 and rebound. 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 up about 5.2 points to 33.40. 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
Spread Between 2-Year and 10-year US Treasuries
Source: St. Louis Fed

Economic News

The US Census Bureau reported that new orders for manufactured durable goods increased 0.8% to a seasonally adjusted $275.0 billion in March. The increase followed a 1.7% drop in February, revised slightly higher from a 2.1% decline. The rise resulted in orders for motor vehicles and parts up 5.0% to $57.78B, appliances up 3.9% to $14.1B, and computers and electronic products up 2.6% to $26.3B. On a year-over-year basis, new orders for manufactured durable goods grew 9.9%, the slowest pace since Feb 2021.

The Conference Board’s Consumer Confidence Index declined slightly in April to 107.3 and followed a 107.6 value for March. The Present Situation Index, based on consumers’ sentiment toward current business conditions and the labor market, decreased to 152.6 from 153.8 in March. According to the index, consumers are less likely to make vacation plans and more likely to make significant purchases like a car or appliance. Based on consumers’ six-month outlook for income, business, and labor market conditions, the expectations index was up slightly to 77.2 in April from 76.7 the previous month. The share of consumers that said jobs are currently plentiful decreased to 55.2%, down from 56.7%. Consumers that said jobs are currently hard to get bumped up to 10.6% from 9.6%.

The first estimate of GDP for 2022 Q1 reported a 1.4% decrease and followed a 6.9% 2021 Q4 increase. The trade deficit was a primary contributor, reducing the GDP by 3.2 percentage points. Imports climbed 17.7% while exports fell by 5.9%. Decreases in private inventory also contributed, reducing the GDP by 0.84 percentage points; the reading followed a solid Q4 report in which inventories increased the GDP by 5.3 percentage points. Government spending across state, federal, and local governments declined 2.7% in the first quarter. An 8.5% reduction in defense spending was a primary contributor. On the positive side, consumer expenditures rose an inflation-adjusted 2.7%.

Thanks for reading Worst Start Since 1939 – Week in Review!


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