Last Updated on November 23, 2022 by Prakash Kolli
Market Sentiment Shifted
Market sentiment shifted about three weeks ago, accelerated by the US Federal Reserve Chairman’s recent speech. Although many companies have beaten estimates, fears of further rising interest rates and a recession have shifted market sentiment to shift negatively. The recent downturn has again pushed the S&P 500 Index toward a bear market at (-17.0%) year-to-date (YTD), although we are not quite there yet. However, according to Stock Rover*, the Nasdaq is still in a bear market at (-25.4%), while the Dow Jones Industrial Averages (DJIA) is performing better at (-13.8%). The two top performing sectors are Energy and Utilities, presumably because of high oil and gas prices and rising electricity demand.
Market Sentiment Shifted and Almost All Asset Classes Are Down
Diversification usually works well; even in 2022, it pays to diversify. However, almost all asset classes are down, and diversification is working to mitigate losses. Notably, the bond market is not a refuge. Market sentiment shifted and has not recovered because of rising interest rates. The iShares 20+ Year Treasury Bond ETF (TLT) is down (-24.6%), while the iShares 7-10 Year Treasury Bond ETF (IEF) is down (11.7%), as seen in our asset class watch list in Stock Rover*. The table also shows REITs and Emerging Markets are performing poorly. Cryptocurrencies have performed the worst and are seemingly ineffective as an inflation hedge or for diversification because they are correlated with growth stocks.
Really, the only asset classes doing relatively well are US Treasury Bills, Short-Term Treasuries, and Gold. Still, gold should be doing better, with inflation the highest in decades.
Recession Fears Are Overstated
A lot of press is dedicated to the coming recession because of rising interest rates. However, I will go out on a limb and say recession fears are overstated, but it may happen. But the US added another 315,000 jobs in August, the 20th month of gains, and the unemployment rate is at 3.7%. So, neither is indicating a recession at the moment. In most recessions, unemployment spikes, and jobs are lost.
Economic data from the First Trust blog illustrates a similar story. Some economic indicators were near pre-pandemic levels in 2019. However, in some cases, they are outperforming 2019 suggesting the shifted market sentiment should not have occurred. The only indicator performing poorly is box office receipts, which could be because of bad movies and children returning to school.
Shifted Market Sentiment – What About the Negatives?
Granted, the world has a high oil price problem worsened by the War in Ukraine. But oil prices are down to about $87 per barrel for WTI and $93 per barrel for Brent. Moreover, average gas prices have been declining in the US for 70+ days and are about $3.796. Moreover, demand is much lower than in August 2021.
Next, China’s economy is doing poorly because of real estate speculation and mismanagement of the COVID-19 pandemic response. Fully 29% of China’s Gross Domestic Product (GDP) is related to Real Estate, a high level and more than the US’ ~17%. Next, many cities are in lockdown and not contributing to the economy. Finally, according to the Wall Street Journal, youth unemployment, and population decline are now a problem. This poor economic performance matters because China is the world’s second-largest economy and a major manufacturer. Continued problems have contributed to shifting market sentiment.
Lastly, global drought is a wild card. Record-breaking heat and low rainfall in many places are causing problems for hydropower generation and agriculture. The US is in drought in many parts of the country, but Europe and China are experiencing their worst drought in decades, if not centuries drying up rivers and lakes. This drought is one reason power and food prices are rising, causing market sentiments to shift.
Electricity prices are also increasing because Russia is limiting gas supplies to Europe. Similarly, lower grain and vegetable oil exports from Ukraine caused food prices to surge.
Final Thoughts on Market Sentiment Shifted
Market sentiment has shifted because of recession fears and the likelihood of more interest rate increases. The Fed has a 2% inflation rate goal, and we are still far from that number, despite inflation recently easing. The negatives have added up, but the resilience of the US economy is shown by the low unemployment rate and job growth.
Despite shifted investor and market sentiment, most dividend growth investors should stay long. As I have pointed out before, the advantages of dividend growth investing outweigh the disadvantages. The investment strategy requires staying long to leverage the power of compounding over time.
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The Stock of the Week
Today we highlight 3M Company (MMM), the industrial giant and Dividend King. According to Stock Rover*, the stock price was down ~29.4% YTD and nearly 35% in the past 1-year, making it one of the worst-performing, Dividend Kings, Dividend Aristocrats, and Dow 30 stocks. In addition, the company has many challenges, including high input and freight costs, a strong dollar, a weak China economy, and lawsuits. The lawsuits are substantial and divided into earplugs and PFAS chemicals. There are roughly 230k+ earplug lawsuits, and the losses may be high, but the full extent is not yet known. Similarly, PFAS lawsuits will cause uncertain losses. You can look at all the news articles in Stock Rover*. The rising number of lawsuits have arguably cause shifted market sentiment about 3M.
We recently updated our dividend safety analysis of 3M. Currently, the dividend is safe. However, we did remove 3M from our list of 5 Best Core Dividend Growth Stocks and replaced it with Visa (V). I also exited my position because divided growth is slowing.
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 August 2022. As a result, the number of companies on the list has risen to 569. 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 August.
The new additions were Mativ Holdings (MATV), Newtek Business (NEWT), Southern Copper (SCCO), Weber (WEBR), Encompass Health (EHC), and Healthcare Realty Trust (FR).
Dow Jones Industrial Averages (DJIA): 31,318 (-2.99%)
NASDAQ: 11,631 (-4.21%)
S&P 500: 3,924 (-3.28%)
The S&P 500 is trading at a price-to-earnings ratio of 19.8X, and the Schiller P/E Ratio is about 29.4X. These multiples are based on trailing twelve months (TTM) earnings.
Note that the long-term means of these two ratios are approximately 16X and 17X, respectively.
The market is still overvalued despite the recent market correction and a bear market. Earnings multiples of 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 flat at 25.47. 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 Conference Board’s Consumer Confidence Index increased in August to 103.2 (1985=100), up from July’s downwardly revised 95.3. The Present Situation Index, based on consumers’ sentiment toward current business conditions and the labor market, increased to 145.4 from 139.7 in July. Based on consumers’ six-month outlook for income, business, and labor market conditions, the expectations index also increased to 75.1 in August from 65.6 the previous month. The share of consumers planning to buy major appliances, homes, cars, and spending on vacations all increased. The percentage of consumers that said jobs are plentiful was reported at 48.0%, down from 49.2% the previous month. Consumers who said jobs are hard to get declined to 11.4% from 12.4%.
The ISM® (Institute for Supply Management®) Manufacturing PMI® for August was reported at 52.8%, as business activity expanded at the same pace as it did in July, beating most economists’ expectations. The report was mixed, with the New Orders Index rising 3.3 points to 51.3%, while the New Export Orders Index was down 3.2 points to 49.4%. Production is just above contraction, and prices are tumbling – with the Production Index reporting down 3.1 points to 50.4% and the Prices Index dropping 7.5 points to 52.5% as compared to July. After three straight months of contraction, the Employment Index bounced back – expanding to 54.2%, 4.3 points higher than in July.
The US Bureau of Labor Statistics reported 315,000 jobs were added in August, as the unemployment rate increased slightly to 3.7% from 3.5% the previous month. Payrolls are now 240K jobs above pre-pandemic levels. The August increase was led by professional and business services (+68K), followed by healthcare (+48K), retail (+44K), leisure and hospitality (+31K), and manufacturing (+22K). Average hourly earnings increased 0.3% in August. At $32.36, average hourly earnings are up 5.2% from a year ago. The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, increased to 62.4% from 62.1% in July. However, the reading remains below the pre-pandemic level of 63.4%.
Thanks for reading Market Sentiment Shifted – Week in Review!
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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.