Rising Dividend
What comes around goes around. What has been going on for the past few years may now be coming to an end. From the pandemic lows of March 2020, low-quality stocks rode a wave of liquidity that is now receding. The roughly $5 trillion of new money creation, and the transfer payments that followed, encouraged risk-taking. After taking a beating at the onset of the pandemic, low-quality stocks suddenly became en vogue after March 2020. From that bottom, low-quality stocks rose 170%, as high-quality stocks rose 104%. But this situation now is going the other way. The Situation Now The…
This morning’s lead story in the Wall Street Journal is about the resilient U.S. economy. According to the report, strong hiring, consumer spending, stock market, and housing trends are all helping. Yet, a closer look shows some peculiar disconnects. Productivity fell again last quarter, manufacturing is rolling over, and the money supply is falling. Moreover, higher interest rates pose a challenge as the S&P 500 moves toward bull market territory. Case for Growth Last week, a scorching hot May jobs report showed the U.S. economy adding 339,000 jobs, far above expectations. Private payrolls grew 283,000, up 2.7% from a year…
The S&P 500 is up 8.8% for the year through May 25. So, we should start celebrating a bull market, right? But look deeper, and a different picture emerges. Take away the top ten, mostly technology, names, and the market return falls to zero. Moreover, those ten stocks performed horribly last year, with an average decline of 43%. The average stock in the broader market, defined as the largest 3,000 stocks in the United States, is also flat for the year. Such narrow leadership is not what we expect in a full-bore bull market. Stumbling Block The market hit a…
Like it or not, debt negotiations and shutdowns are integral to the political process, recurring over the past 50 years. The fear of a budget impasse, shutdown, default, and debt downgrade has again gripped the markets. However, it is unlikely that lawmakers will allow a debt default, following instead a familiar pattern of bipartisan argument, brinksmanship, and, finally, compromise. While an outright U.S. government debt default is improbable, we should emphasize quality due to its numerous benefits. Durable, flexible, and predictable firms tend to fare better in uncertain times. In contrast, financially weak firms are more susceptible to government default…
Consistency is not flashy. Consistency does not take center stage. Consistency does not make headlines. Yet, consistency wins the day when predictability is in short supply, as it is now. With many observing that the recession risk is high, earnings could be at risk. Sales and profit margins for the S&P 500 companies are rolling over. Forecasted earnings trends are also headed down. Several high-profile companies that boasted stellar growth in 2020-2021 are falling flat. For this reason, we thought we should focus on consistency — one of the three pillars of our definition of “quality.” Consistency Defined When evaluating…
Index funds have gathered a devoted following since their debut in the 1970s. According to the Investment Company Institute, passive indexes and exchange-traded funds (ETFs) were 43% of the $29 trillion mutual fund industry. A main selling point of the funds is their “hands-off” nature, requiring little ongoing research or knowledge. But these funds are more active than you might think. While the funds do mirror an index’s composition, the index itself can change a lot. Those changes can be more significant than you think and introduce unwanted risks. Set and Forget Strategy An appeal of passive funds is their…
Earnings drive stock prices over time. This simple truth is evident in the past century’s market performance. Over the past 100 years, both the S&P Composite index and S&P Composite index earnings gained about 6-7% per year. The profits, along with the market’s appraisal of the value of those earnings, rose and fell year-to-year. Sometimes, those swings in earnings and valuations were large, creating excitement and anxiety. What drove the earnings growth? Fortunately, we see an excellent and rational cause for the growth in earnings. As the chart below shows, we can trace growth in stock prices to economic growth…
Investors have done well to heed Marty Zweig’s advice “Don’t fight the Fed” since he published his 1970 book, Winning on Wall Street. The idea has generally stood the test of time. The most recent two major recessions and market declines, those in 2000-2002 and again in 2007-2008, were preceded by Federal Reserve (Fed) policy tightening. So too were the recessions and bear markets of 1973-1974, 1980-1982, and 1991-1992. The 1987 market crash was, likewise, preceded by rising rates. In each case, efforts by the Fed to rein in inflation via tighter monetary policy proved effective in fighting inflation, but…
We critique existing “style” investing frameworks as popularized in various “value” and “growth” indices. We cite three critical problems with how the indices are constructed, and discuss risks that come with overly strict adherence thereupon. Lastly, we offer an alternative framework as a potentially better way to think about investments.
The economy is either in recession or booming. This is what the headlines are telling us each week. So, against this muddled stream of seemingly conflicting and contradictory information, we look for signs regarding which way we are headed. Consider the following evidence for the “recession” case and the “boom” case.
Where do you want to be invested when faced with the prospect of a bear market? Some say that high dividend yields provide protection when stocks fall. This implies that since the yield rises as the stock price declines, new buyers will be attracted as the price drops. Such buyers could help establish a “floor” below the stock. While this sounds good in theory, we find scant evidence that it actually works in practice. This strategy fails when needed most because “high yielders” tend to be fundamentally weak. While some high-yielding stocks may be good bargains, most high yields reflect…
With the U.S. stock market near highs, we look at the role “beta” plays in portfolios and why we favor combining “beta” with fundamentals. We find that 1) the pandemic era brought a rise in average “betas”, and 2) that “betas” behave differently based on fundamental quality.
Quarterly Report
Principles
Dividend Investing
