Like a Yo-Yo
Like a yo-yo, the S&P 500 Index and, to a certain extent, the Nasdaq have declined and bounced back repeatedly this year. First, the S&P 500 entered a correction and bounced back. Next, it flirted with a bear market and bounced back. Next, the Index entered a bear market a few weeks ago and bounced back significantly this past week. Finally, some indices and sectors recovered a large percentage of their losses, with only Energy, crude oil, and the CBOE VIX declining based on data from Stock Rover*. These are all good things from the perspective of lower future inflation.
However, the long-term trend has been inexorably downward since January 2022. Investors have not caught a break with the US Federal tapering and increasing interest rates, inflation, high oil and gas prices, excessive COVID-19 shutdowns in China, and the war in Ukraine.
That said, the Fed will likely eventually succeed in bringing inflation under control. Growth stocks and some alternative investments will probably respond well. Until then, stocks will behave as they have, like a yo-yo, trending down as CPI news releases, Fed announcements, and Chairman Powell’s speeches approach and recover somewhat in between.
Since the 0.75% increase, oil prices are down, container shipping prices are declining, and commodity prices are down. All of this is good news for inflation and a less hawkish Fed.
Stocks Are Still Undervalued
Around 1-month ago, I wrote a week in a review titled, Stocks Are Undervalued. But, of course, Mr. Market, like the yo-yo it has been, did not cooperate and continued its downward trend exacerbated by the recent poor inflation report of 8.6% and the Fed’s 0.75% rate increase, the largest one since 1994. Although, Mr. Market did bounce back this past week.
However, the effect is stocks are more undervalued than 1-month ago. The P/E ratio of the S&P 500 Index is now about 19.8X, the lowest since April – May 2020. The Dow Jones P/E Ratio is about 18X.
|Date||P/E Ratio (TTM)||Dividend Yield|
The inescapable conclusion is that the valuation of the Dividend Kings has declined since they peaked in May 2021. In fact, my internal tracking shows that based on the P/E ratio, most categories of dividend growth stocks are at their lowest valuations from April 2020 to May 2020. In addition, some stocks are trading at their highest yields and lowest valuations in years.
Whether we’re talking about stocks or socks, I like buying quality merchandise when it’s marked down.
Dividend Growth Strategies Outperform
Dividend growth and other dividend strategies have outperformed during this year’s bear market. This fact holds true for year-to-date performance and the trailing 1-year and 2-years versus the S&P 500 Index and the Nasdaq based on data from Stock Rover*.
If you do not believe me or the data, a recent article on Morningstar highlights this point. The first sentence is,
Dividend investing strategies of all kinds have held up well this year, helping investors fight off headwinds as the broader equity market falls into bear territory.
Final Thoughts on Like a Yo-Yo
The market has been one step forward and two back all year, like a yo-yo. In general, though, dividend investing strategies have outperformed this year by a relatively significant margin. Next, some stocks are undervalued, trading at the lowest earnings multiples and highest yield in years. They have behaved like a yo-yo and declined and then increased and back down again even further. Small investors should take this opportunity to do their research and add to positions.
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The Stock of the Week
Today we highlight Medtronic (MDT), one of the global leaders in medical devices and equipment. The company has four business segments: Cardiovascular, Medical Surgical, Neuroscience, and Diabetes. According to Stock Rover*, the stock price was down roughly (-15%) in 2022 and an even more significant decline of 27.9% in the past 1-year. The company has struggled during the pandemic with fewer elective surgeries, shutdowns in China, and supply chain challenges.
Medtronic is a long-time Dividend Aristocrat and Dividend Champion with 45 years of increases. The forward dividend yield is ~ 3.01%, the highest in the past decade. The stock price is below the 50-day and 200-day exponential moving average (EMA). The forward P/E ratio is about 16.2X, below the range in the past five years and ten years. The company is at the lower end of its range for multiple valuation metrics.
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 May 2022. As a result, the number of companies on the list has risen to 557. 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.
Six new additions indicate companies are experiencing solid profits and cash flow in May.
The new additions were CVR Partners, LP (UAN), Oasis Petroleum (OAS), Eagle Bulk Shipping (EGLE), United Guardian (UG), Golden Ocean (GOGL), and Ellington Residential Mortgage REIT (EARN).
Dow Jones Industrial Averages (DJIA): 31,504 (+5.40%)
NASDAQ: 11,608 (+7.49%)
S&P 500: 3,913 (+6.46%)
The S&P 500 is trading at a price-to-earnings ratio of 19.77X, and the Schiller P/E Ratio is about 30.22X. These multiples are based on trailing twelve months (TTM) earnings.
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
Shiller PE Ratio History
Stock Market Volatility – CBOE VIX
This past week, the CBOE VIX measuring volatility was down about 0.5 points to 27.23. 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.
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.
The National Association of Realtors reported that existing home sales fell 3.4% in May to a seasonally-adjusted annual rate of 5.41M, down 8.6% compared to May 2021. Home sales have now dropped for four consecutive months. Sales of single-family homes fell to a 4.80M annual rate (-7.7% Y/Y), and existing condo sales dropped to a 610K annual rate (-15.3% Y/Y). Total housing inventory was reported at 1.16M, up 12.6% over April’s list (-4.1% Y/Y). Unsold inventory is at a 2.6-month supply, up from 2.2 months in April and 2.5 months in May 2021. The median sales price exceeded $400,000 for the first time, increasing to $407,600 (+14.8% Y/Y).
The Labor Department reported a slight decrease in initial jobless claims for the week ending June 18th. The seasonally adjusted initial claims were reported at 229,000, decreasing 2,000 from the previous week’s upwardly revised level. The last week’s initial claims value was revised from 229,000 to 231,000. The four-week moving average, which smooths out volatility was 223,500, an increase of 4,500 from the previous week’s revised average. Claims continue to hover between 200,000 to 250,000 since hitting a 50+ year low of 166,000 in March.
The Commerce Department reported new home sales increased for the first time in four months, jumping 10.7% in May to a seasonally adjusted annual rate of 696,000 units. April’s new home sales were also significantly higher to 629,000 units from the reported 591,000 units. Sales increased in the West (+39.3%) and South (+12.8%), while the Northeast (-51.1%) and Midwest (-18.3%) saw substantial declines in May. The median new house price surged 15% year-over-year to $449,000; the average sale price was $511,400.
Thanks for reading Like a Yo-Yo – Week in Review!
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