Today's April retail sales release seems to be cited as the cause of today's market sell off. I am not sure the .4% decline in April is the only reason for the market pullback. Retail sales were expected to show a .1% increase so the April sales figure did fall short of the estimate.
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Inventory related data was also released for the period ending in March. Inventory levels declined by almost 1%, but the inventory to sales ratio has remained at 1.44 for the past two months. Sales continue to decline at a faster pace, falling 1.6%.
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I believe the slightly negative results contained in the above two economic data points provided the catalyst for the sell off. As noted in yesterday's post, stocks had advanced in a nearly uninterrupted pace since early March. The market needed to consolidate these recent gains.
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The percentage of stocks trading above their 50 day moving average fell to about 86%. As the above chart indicates. This percentage has been above 90% since late April/early May. Additionally, the MACD has turned slightly negative at -.707 so is the market setting up for a bigger consolidation?
All of the above data points are rear view mirror looking. On a going forward basis what might impact the direction of the market?
investors still have large amounts of cash on the sidelines. A large number of these investors will use the pullback to add to equities. The market decline has resulted in investor's equity allocation to fall below target levels; consequently, this pullback could be short lived and a more significant contraction could occur in mid to late summer after the cash has been pulled off the sideline.
It would have been nice to go all in on March 9th, but that activity goes against the emotional side of investor behavior. At this point in the cycle, being selective and focusing on high quality dividend paying stocks for the foundation of ones equity portfolio should pay off in the longer term.
On March 9th many investors were glad to be holding sizable cash balances in their investment portfolio when the S&P 500 Index hit an intra day low of 667. Since that time the S&P has moved higher by nearly 36%. Now investors are lamenting the fact they are holding cash that is earning very little interest. Keep in mind, the Fed's goal is to get investors to move out of cash into more risky investments.
We are at the point where the "less bad" news is viewed as good by the market. Appropriately, economic data that is getting less worse is a positive, but data, like unemployment, needs to turn into employment growth. Losing 500,000 jobs is still bad although it isn't as bad as losing 600,000 job like we have seen recently.
Several discouraging pieces of data in the short term are related to consumers. Consumer revolving credit continues to decline. Record job losses are contributing to the credit decline.
In the long run, reducing consumer debt is a positive as the consumer is too leveraged at the moment. However, short term, reduced consumer spending is a drag on GDP growth since consumer spending has accounted for 70% of GDP growth. So where does economic growth come from?
The level of inventory remains bleak, but additional data will be released on Wednesday regarding inventory levels.
Lastly, the bull market run has seen a majority of stock prices move higher. The percentage of NYSE stocks that are trading above their 50 day moving average is over 90%.
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Today's market action saw a rotation into some of the defensive sectors in the S&P 500 Index. The health care sector was up 4.08% and the staples sector increased 3.08%. The economically sensitive sectors saw declines: industrials down 2.46% and technology down 1.64%.
A market correction at this point that consolidates recent gains would certainly be healthy.
Many investors are familiar with the adage, "sell in May and go away," as superior market returns have been achieved in the November to April period. This adage has not always worked though. Standard & Poor's notes the sell in May approach would have been correct in two out of three years. After bear markets though the May to October period is generally a strong one.
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In investing, few strategies are certain. Given the market's strong advance since early March, consolidating some of the recent gains would be healthy: perhaps a near retesting of some earlier technical lows, like the 50 day moving average around 812.
Source:
Sell in May? ($) The Outlook Standard & Poor's By: Sam Stovall, Chief Investment Strategist May 13, 2009 http://www.outlook.standardandpoors.com/NASApp/NetAdvantage/servlet/login?url=/NASApp/NetAdvantage/index.do
Pepsico (PEP) announced a 5.88% increase in the company's third quarter dividend to 45 cents per share. This compares to a quarterly dividend of 42.5 cents per share in the same quarter last year. The rate of dividend increase for the company is declining from the 5-year historical dividend growth rate of 14%.
The projected payout ratio based on the new dividend is 44% based on 2010 estimated earnings per share of $4.02.
The 5-year average payout ratio is approximately 41%.
PEP carries a S&P Earnings and Dividend Quality Ranking of A+.
Standard & Poor's tracks monthly dividend information for more than 30,000 firms and provides dividend detail in their monthly dividend action report. For the period ending April 2009 it is evident that dividends are becoming less sacred for those companies that paid and increased dividends in the past.
The chart data below shows decreased and omitted dividends surged to 480 for the four months ending April 2009 versus 111 for the same period last year. Increases fell to 252 versus 632 for this same time period.
Could the market's recent advance simply be one of several bear rallies we can expect to experience in this secular bear market that began in 2000? As the below chart notes, the current rally in the Dow is shorter in duration and magnitude than the average 1929-1932 bear market rally.
It is not uncommon to have these bull runs in secular bear markets. Crestmont Research has a nice table of past secular bear and bull markets that detail the intermediate bull and bear periods within each cycle. Even in bear markets, such as in the bear market of 1966-1981, there were nine positive years that generated an average return of 13%. The entire 16 year period saw the market return -10% from the beginning to the end of the bear period.
November of last year marked the first year in over 15 that investors had more of their assets allocated to cash than to equity. Not surprisingly this cash is beginning to find its way into the market.
“Most investors have missed the rally” in U.S. stocks, so further gains are likely as they spend some of their cash to buy shares, according to Andrew Garthwaite, a global strategist at Credit Suisse Group.
Garthwaite believes the S&P 500 Index could reach 1,000 before settling at 920 at year end.
This week's sentiment survey released by the American Association of Individual Investors indicated an increase in individual investor bullish sentiment. The bullishness level increased to 36.09% versus last week's level of 31.82%. For the week of April 16th, the bullishness level stood at 44.14%.
The bull/bear spread was reported at -8% versus last week's spread of -7%. The spread became more bearish as more investors indicated a bearish view of the market: 43.61% versus 38.64% last week.
The chart of the market and sentiment for the current period is beginning to play out like the June 2002 - March 2003 period. Maybe a coincidence or maybe the current market needs to come close to retesting the early March 2009 low.
What to do now is the question of the day for those investors with cash on the sidelines: and it is a lot of cash. Now is the time to take a step back and evaluate where the market was in early March and where it is today.
In early March, investors were selling. The media was talking about a major economic and market meltdown at that time. And I will be the first to admit, I was not too constructive on the market in early March either. Since that time though, the market has embarked on a significant advance. Some cautionary technicals noted in the below chart are the MACD is negative and volume has been declining.
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Today the S&P 500 Index closed at 873 which is above its 150 day moving average of 869. The 50 day moving average appears to have bottomed and started to move higher. These factors are just a couple of positive technical factors.
Additional cautionary data is the fact that over 90% of the NYSE stocks are trading above their 50 day moving average. At the March 9th low only 7% of NYSE stocks were trading above their 50 day moving average. As the below chart notes, when the 50 day percentage gets into single digits, it is generally a good time to begin building positions in stocks. On the other hand, when this average is above 80%, the S&P does have a tendency to sell off or at least consolidate some recent gains.
(click to enlarge 1-year chart)
(click to enlarge 3-year chart)
Now is the time to be selective in the stocks that are being purchased. There are companies trading at attractive values, but paying attention to stock fundamentals and dividend characteristics are important at this juncture in the market.
Efficiently functioning credit markets are integral to sustaining growth for the economy. Certainly, the Fed and Treasury are doing their part in pushing this improvement forward. There will be consequences down the road, i.e., higher inflation? For the time being though, getting the economy (GDP) growing again is the Fed's primary goal.
The TED spread, the difference between 3-month LIBOR and the 3-month Treasury bill rate, has narrowed significantly from its peak in October of last year.
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One outcome of the improved credit markets has been an improvement in the performance of high yield debt. One measure of the high yield debt market is the iShares iBoxx $ High Yield Corporate Bond ETF (HYG). High yield bonds tend to have volatility characteristics not to dissimilar from stocks. The recent improvement in the performance of the HYG ETF is also an indication of a better functioning credit market.
And what a difference a year makes. The high yield market was one of the worst performing segments of the fixed income markets in 2008, but, the first 3 months of this year have high yield leading the fixed income performance segment.
The economy could certainly be at an inflection point where "less bad" economic data is viewed as a positive. In other words the rate of change or second derivative of a number of data points is now positive. If the economy continues to show improvement, just maybe, stocks can finish the year in positive territory. That is not to say their won't be pullbacks along the way. The market has bounced hard off the early March lows.
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But, if an investor is looking for some "equity like" diversification, high yield might be considered as a part of ones investment portfolio.
Not all dividend paying companies are reducing their dividend or forgoing dividend increases.
Today Johnson & Johnson (JNJ) announced a 6.52% increase in the company's quarterly dividend. The new quarterly dividend is 49 cents per share versus 46 cents per share paid in the same quarter last year. The estimated payout ratio is 40% based on 2010 estimated earnings of $4.86. The 5-year average payout ratio is 40%. The company carries an S&P Earnings & Dividend Quality Ranking of A+.
In addition to JNJ's announcement, Kellogg (K) stated they would be increasing the company's 3rd quarter 2009 dividend 10.29%. The new quarterly rate of 37.5 cents per share compares to 34 cents per share paid in the 3rd quarter of 2008. The estimated payout ratio is 48% based on 2010 estimated earnings of $3.10. The 5-year average payout ratio is 49%. The company carries an S&P Earnings & Dividend Quality Ranking of A.
Today, The J. M. Smucker Co. (SJM) announced a 9.38% increase in the company's quarterly dividend. In the 4th quarter of 2008, SJM acquired Procter & Gamble's Folgers coffee business. Near that same time, Standard & Poor's added SJM to the S&P 500 Index.
Smucker does not technically meet my definition of a dividend growth stock since the company has not maintained uninterrupted dividend growth over the course of the past 10-years. SJM went from June 2000 through June 2002 without increasing the dividend. On the other hand, over the course of the last five years, the company has grown the dividend just under 7% per year.
The most recent announcement has the company increasing the quarterly dividend to 35 cents per share payable June 2009 versus 32 cents per share in the same quarter last year.
The projected payout ratio is approximately 41% based on estimated April 2010 year end earnings of $3.36 per share. The 5-year average payout ratio is 38%.
The company has a S&P Earnings & Dividend Ranking of A+
That concludes this edition of the Festival of Stocks. Submit your blog article to the next edition of festival of stocks using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page.
The Chart of the Day charting service published a chart last week noting market performance two months before the start of a recession and the period following a recession. As noted on the chart, the stock market (S&P 500 Index) tends to begin its decline several months before the onset of a recession. The chart illustrates the average performance of the S&P 500 since 1945 following the beginning of a recession (blue line). The extend of the market's decline following the start of the recession for the 2001 recession and the most recent recession that began in December 2007 has been more severe.
One factor that has been painfully clear in this market downturn is the high correlation of nearly all asset classes. The result for investors is nearly all the asset classes experienced significant declines during the recent market contraction. So what is the purpose of diversification if it does not minimize the negative portfolio returns during stress market periods? The answer begins with the question as to what are investors trying to diversify.
During periods of market stress there tends to be two factors that influence the price of investments:
there is a flight to quality and
a high demand for liquidity
This flight to quality and demand for liquidity causes investors to flock to the safest investments. For fixed income this tends to be government bonds and for equities it tends to be high quality equities. These high qulaity equities tend to be large cap blue chip dividend growth stocks.
A recent paper by Barclays Global Investors titled, Is Diversification Dead?, provides more detail on the conundrum for investors as it relates to the diversification issue.
In the end though, it is difficult to predict when the market will experience these significant drawdowns. For investors, building the foundation of the equity portion of their investment portfolio in high quality dividend paying stocks is one way to potentially gain some assurance they will not experience significant market value erosion in market downdrafts.
As I have written several times before, when the market rallies off of a bottom during these corrective phases, the higher quality equity investments will likely lag the broader market returns though.
After the market close today, Procter & Gamble (PG) announced the company's quarterly dividend will be increased 10% to 44 cents per share versus 40 cents per share in the same quarter last year. The increase is in line with the company's 10-year historical dividend growth rate of 9.8%.
The projected payout ratio is 43% based on the June 2010 year end earnings estimate of $4.07. The company is estimated to earn $4.23 per share for the year ending June 2009. The 5-year average payout ratio is approximately 40%.
P&G carries an A+ S&P Earnings and Dividend Quality Ranking.
It is not surprising that a recent paper published by the Chicago Federal Reserve notes a high positive correlation between consumer spending and consumer sentiment. Keep in mind this does not mean there is a causal relationship, merely a correlated one.
The spending data detailed in the below chart is through 2006. The most recent BLS data is through 2007 and notes a 2.6% increase in 2007 which was lower than the 4.3% increase in 2006.
The paper notes the top household income quartile is most impacted by changes in the stock market (i.e., S&P 500 Index).
"Higher income consumers are more sensitive to associated changes in the stock market, as reflected in the Standard and Poor’s (S&P) 500 Index; a 1 percentage point increase in the index is associated with a 0.43 percentage point increase in consumption spending for this group."
Additionally, the policies out of Washington are likely having an impact on consumer sentiment as it relates to the top two income quartiles. Policies that are not favorable for corporate earnings; thus, negatively impacting the stock market, are likely to constrain consumer sentiment and spending. The paper notes:
"...it might be useful for policymakers to understand the differences in the macroeconomic indicators for different groups...sentiment is particularly informative with regard to consumption spending in a context of greater uncertainty in income..."
Source:
Trends in Consumer Sentiment and Spending Chicago Fed Letter By: Maude Toussaint-Comeau, economist, and Daniel DiFranco, associate economist May 2009 http://www.chicagofed.org/publications/fedletter/cflmay2009_262.pdf
The market's recent move higher since March 9th has certainly been impressive. A number of technical indicators are supporting this positive trend; however, volume continues in a downtrend. The more pronounced volume decline can be seen on the below chart of the weekly S&P 500 Index ($INX), keeping in mind this past week was a holiday shortened one.
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The daily chart shows resistance at the 875 level for the S&P 500 Index ($INX). Additionally, the Money Flow Index has been trending lower since reaching near 80 on March 26th.
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Given the improvement in investor sentiment, the declining MFI and the lower trending volume, I would not be surprised to see the market digest some of the recent gains near term. Earnings reporting season swings into full gear and some reports could trigger some corrective action.
Although the American Association of Individual Investors sentiment survey reported a drop in bullish sentiment (35.71% vs. 42.66%) this week, the 8-period moving average continues to trend higher. This 8-period average of the bullish sentiment came in at 29.2% this week versus last week's reading of 27.4%.
In addition to the improving trend in bullish sentiment, investors seem to be putting their feelings into action. The Investment Company Institute reports money market cash levels have declined to $3.834 trillion for the period ending April 1, 2009 versus the March 4, 2009 level of $3,903 trillion.
Today Standard & Poor's reported first quarter dividend activity and it certainly was not favorable. Not only were a record number of companies slashing their dividends, other payers were not increasing dividends as well. Howard Silverblatt, Senior Index Analyst at Standard & Poor’s notes:
"...since 1955, the average has been 15 increases for every decrease. Now its three increases for every four decreases.”
Following are some statistics on the first quarter dividend activity:
a record 367 of the approximately 7,000 publicly owned companies that report dividend information to Standard & Poor’s Dividend Record decreased their dividend payment. This represents a 332% increase from the 83 issues that decreased their dividend during the first quarter of 2008.
a record low 283 issues announced they will increase their dividend payment – a 52.7% drop from the 598 issues that reported dividend increases during the first quarter of 2008.
Standard & Poor's Dividend Aristocrats are underperforming the broader U.S. domestic indexes. on a year to date basis. Through April 4th, the Aristocrats have generated a return of -7.20% compared to the S&P 500 Index return of-6.70% and the Nasdaq Index return of +2.80%. The Aristocrats have managed to outperform the Dow Jones Industrial Average Index that has returned -8.60% so far this year. Although financials are the worst perming sector in the S&P 500 Index year to date, only four of the bottom ten performers are financial stocks.
Given the difficult economic environment, stocks of companies that pay a dividend have increasingly elected to reduce or eliminate dividends in order to conserve cash.
S&P reports actual first quarter dividend payments for companies in the S&P 500 Index were down 15.99% and this is the worst rate of decline since the -24.44% decline in the third quarter of 1958. David Blitzer, chairman of S&P's index committee, indicates S&P may need to loosen the criteria used to judge whether companies qualify for the Aristocrats Index. The big hurdle is a company has to have demonstrated annual increases in the dividend for at least 25 years.
S&P makes adjustments to the Aristocrats Index in December and only companies that paid more this year compared with 2008 will be retained . S&P's Aristocrats list currently contains 52 companies. Based on dividend cuts by some of the Aristocrats and "no increase" by companies in 2008, the potential list of firms that will be eligible for the index could fall below 40. This would be the lowest number of firms since 1992.
The 2009 Dividend Aristocrats list is detailed below.
Bloomberg reports, "the Dividend Aristocrats Index returned an annualized 9.1 percent a year since 1989, compared with 6.6 percent for the S&P 500 Index, the main benchmark for American equities. It lost as much as 49 percent from its 2007 peak, while investors in the S&P 500 retreated as much as 57 percent." In spite of the fact the markets have declined by a significant amount, the Aristocrats have outperformed the S&P 500 Index.
Consequently, I believe S&P should not reduce the criteria used to determine the eligibility of companies for the Aristocrats membership. Companies that can increase their dividend every year over at least 25 years tend to be firms that have or project a strong earnings and cash flow profile. In the end it isn't the number of stocks you own, but owning the right stocks.
This week Value Line (VL) introduced a new model portfolio that will consist of companies with above market dividend yields. The benchmark for the stocks in the portfolio will be the U.S. Broad Dividend Achievers Index ($DAA.X).
The Value Line portfolio will begin with a market value of $1 million and initially consist of 20 equally weighted companies. VL will rebalance the portfolio from time to time in order to keep the stock weightings between 4-6%. VL notes:
"...many of the dividend payers of final interest will likely tend to be large, more established, companies with market capitalizations of more than $5 billion, and this select set will comprise the bulk of our group. In an effort to boost returns, though, we will also seek out mid-cap stocks with good dividend prospects."
The initial portfolio of companies are detailed in the below table.
According to Mergent and its Index company, Indxis:
"The Broad Dividend Achievers™ Index is comprised of companies incorporated in the United States or its territories, trade on the NYSE, NASDAQ or AMEX, and have increased its annual regular dividend payments for the last ten or more consecutive years. In addition, Indxis requires that a stock's average daily cash volume exceed $500,000 per day in the November and December prior to the annual reconstitution date on the last trading date in January. The Index is calculated using a modified market capitalization weighting methodology and has been published by the American Stock Exchange under ticker symbol DAA."
Value Line will provide weekly portfolio commentary in its Selection & Opinion publication.
Investor bullish sentiment reported earlier this week by the American Association of Individual Investors indicated a decline in the bullish sentiment level. Bullish sentiment was reported at 39.13% versus last week's level of 45.06%. Most of the bullish investors turned bearish causing the bull/bear spread to turn negative. This week's bull/bear spread equals -3% versus last week's spread of +7%. Although the eight period moving average of bullish sentiment did tick higher this week, the trend for this indicator has been declining since January 2004. It could be the strong move in the market since March 9th is causing investors to take a little money off of the table.
On an inflation adjusted basis, homes prices have fallen 33% from the peak in 2005. The below chart shows single family home prices are now back in a range that existed from the late 1970s into the mid-1990s. Chart of the Day notes, "...a home buyer who bought the median priced single-family home at the 1979 peak has actually seen that home lose value (1.6% loss). Not an impressive performance considering that nearly three decades have passed."
Standard & Poor's reported that share buybacks in the 4th quarter of 2008 feel 66% compared to the 4th quarter of 2007. Conversely, on a sequential basis, dividends actually trended higher to $62.19 billion versus $61.44 billion in the 3rd quarter of 2008. The fact aggregate dividends did trend higher in the 4th quarter is proof there are companies that continue to increase their dividend. Dividend growth companies tend to be more committed to continuing dividend payments versus a continued commitment to a stock buyback.
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Howard Silverblatt, Senior Index Analyst at Standard & Poor’s noted,
"The need to conserve capital in the current recession, combined with the uncertainty of future cash flow, has made buybacks a high risk component for corporate planners. Due to the current market environment, we expect buybacks to remain weak with the potential for companies to use existing treasury shares(emphasis added) to satisfy options, as well as smaller M&A."
S&P prepared a report mid year 2007 noting the risk of these treasury shares on a company's balance sheet if the shares were not actually retired. If the shares are not retired they can be reissued and dilute existing shareholders, thus defeating the benefit of the original buyback. As Howard Silverblatt noted above, companies may use existing treasury shares to satisfy option execution.
Given the magnitude of the up moves and down moves in the stock market since 2000, many stock investors are now wondering what their investment approach should be going forward. Certainly evaluating ones risk tolerance at this point in the market cycle is appropriate. Assuming some level of equity exposure will remain a part of ones overall portfolio allocation, what type of market movement might investors expect going forward. Technical strategists are looking to the movement in gold (GLD) prices for insight, but note, I am not a gold bug.
As the below chart of the monthly closing prices for the S&P 500 Index ($INX) notes, the index reached 1,517.68 in August 2000 and subsequently declined 46.2% to 815.28 in September 2002. The market had moved down over 20% before 9/11. The S&P then recovered to 1,549.38 over the next five years ending on October 2007. Since October 2007 the market has proceeded to decline over 50% to the February closing price of 735.09.
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Since reaching 735 in February, the S&P 500 Index ($INX) has recovered some ground and closed at 806.25 today. This closing price is just below the September 2002 close of 815, which may serves as resistance for the market.
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What investors need to keep in mind is we are still in a secular bear market. However, shorter term bull market moves can and do occur during these phases. One question then is how long will the bear market last.
The below table from Crestmont Research details bull and bear market cycles using the Dow Jones Industrial Average Index ($INDU) going back to 1901. Up until 1941, bull and bear market cycles tended to be shorter in nature, i.e., lasting four to five years on average. However, beginning in 1942 the market cycles lengthened quite dramatically--averaging about 19 years now.
With these longer cycles, it became more common to have cyclical bull market phases within these secular downtrends. For example, in the 1966-1981 bear market the market achieved 9 positive returning years versus 7 negative returning years. The average return for the positive years was 13% and the average for the negative years was -15%. For the entire 16 year period, the market was down a cumulative 10%. One factor is certain and that is one can't predict when the end of this bear cycle will occur.
As noted earlier though, strategists are turning to gold for potential clues. An investor can think of this as someone making the decision to invest in paper assets (stock) versus hard assets (gold). The below chart shows the monthly closing price of the Dow Jones Industrial Average (green line) and the Dow Index divided by the price of gold (red line).
(click to enlarge)
Historically, the Dow Index has bottomed when the Dow/Gold ratio fell to 3 or lower. The ratio was about 7 when the market hit its recent low of 6,547 on March 9, 2009. The Dow Index is used most frequently since data on that index goes back to 1896 and the S&P 500 Index was first created in 1957. The chart of the S&P 500 Index priced in relation to gold is detailed below.
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The chart moves seem dramatic so the below chart uses a logarithmic scale for gold and the S&P 500 Index. A log scale is essentially charting the same percentage moves. For example, the distance from 10 to 100 on the chart is the same as the distance from 100 to 1,000.
(click to enlarge)
A couple of takeaways from this information for investors.
we are likely still in a bear market, but cyclical bull markets are not uncommon during this type of market so money can still be made on the long side.
in reviewing the secular bull & bear market chart above, the stock valuations (P/E) at the end of bear markets tended to be around 10 or less. The current 10 year trailing P/E is 14. This market decline has reduced the valuation on a number of high quality stocks so investors may want to consider building positions in those type of equities.
many investors have a desire to add bonds/fixed income to their portfolios. From an overall asset allocation perspective, fixed income can act as a shock absorber in down market periods. Interest rates are at record lows though and the fed is pumping money into the economy in hopes of stimulating future growth. This type of stimulus has tended to be inflationary. If growth and inflation take hold, the Fed will be quick to raise rates. In a rising rate environment, bond prices will fall. In that regard, below is a S&P/gold chart with the Fed Funds rate graphed as well. Given the potential for inflation, investors should consider looking at some type of inflation protected investments in their portfolio.
Inventory related data was also released for the period ending in March. Inventory levels declined by almost 1%, but the inventory to sales ratio has remained at 1.44 for the past two months. Sales continue to decline at a faster pace, falling 1.6%.
The percentage of stocks trading above their 50 day moving average fell to about 86%. As the above chart indicates. This percentage has been above 90% since late April/early May. Additionally, the MACD has turned slightly negative at -.707 so is the market setting up for a bigger consolidation?
