The stock market bear so many hoped would hibernate through winter is clomping at the mouth of his cave, feeling most foul. And that has investors burying their heads faster than that other cursed creature of cold-weather tidings, Punxsutawney Phil.
Unfortunately, no homely groundhog let alone groundswell of investor courage can lull this long-sleeping brute. When the bear awoke is still debated; Morgan Stanley strategists said November, others said December and a few rah-rah holdouts conceded just in time for New Year’s Day. Regardless, even a fantasy Federal Reserve deep freeze on interest rates can’t change the bitter-cold truth: In December, the Dow Jones industrial average lost some 2,500 points — close to 10 percent of its value — and capped its worst year since the Great Recession.
Meanwhile, some question if the bear has truly awoken or is just grumbling in his sleep.
“We’re not in a bear market,” says Tony Roth, chief investment officer of Wilmington Trust, based in Wilmington, Delaware. “We’re experiencing more of a period of correction and consolidation.”
[See: 10 of the Best Stocks to Buy for 2019.]
What’s more, “Not all asset classes are in a bear market right now,” says Larry Wasserman, senior manager, head of due diligence and investment opinion at PNC Investments in Pittsburgh.
“Some of the more defensive sectors such as consumer staples, health care, real estate and utilities remain lower, but not in bear market territory,” Wasserman says. “If we expect the market to continue to trend lower, then shifting assets into less risky, more defensive economic sectors might be an appropriate strategy.”
Whether the longest bull market in history — close to 10 years — has ended, January still begins with a bout of investor blues and nagging questions. “Market participants have had a lot to digest,” says John Lynch, chief investment strategist for LPL Financial and based in Charlotte, North Carolina.
That includes — double-deep breath — “the risk of a policy mistake by the Fed, the China trade dispute, the government shutdown, cabinet-level departures from the White House, the U.S. decision to pull troops out of Syria and Afghanistan and communication mishaps by the Fed and Treasury Secretary Steven Mnuchin.”
To put it mildly, “These issues have given market participants too much uncertainty to shrug off,” Lynch says.
Meanwhile, here’s another riddle investors would rather not ponder: Will healthy dividends take a hit in a bear market, even among those “dividend kings” that haven’t cut their payouts in decades?
It’s hardly a remote possibility. With the bear’s arrival, formerly dividend-averse companies such as Apple (ticker: AAPL) could chop their awards to jumpstart their growth. In fact, it could be a necessity in the wake of Apple warning of stagnant iPhone sales during the holiday period, which sent the stock skidding by 9 percent Thursday.
After its worst trading day since 2013, AAPL now sells at about $148 per share — off almost 40 percent since October. Since then, it has also shed more than $450 million in market capitalization, more than the total value of Netflix ( NFLX), Tesla ( TSLA), General Motors Co. ( GM) and Ford Motor Co. ( F) combined.
In the market at large, “There is risk to dividends,” Roth says. “Our forecast for year-over-year earnings growth is down to 6 percent. This doesn’t imply that equities aren’t attractive. At the same time, we’re actively assessing the likelihood of a recession in 2020. If this happens, dividends will of course be negatively impacted.”
Did someone just say “recession”?
[See: 10 of the Best Dividend Stocks to Buy for 2019.]
Meanwhile, “Dividends and share buybacks are likely to either get reduced or halted altogether,” says Eric Basmajian, macroeconomist at Seeking Alpha. “We’re starting to see the early signs of companies guiding down earnings estimates in the face of an economic slowdown that is more severe than many are currently modeling.”
And some companies will see challenges the likes of which no dividend king wants to even think about. When trouble hits — and nothing so troubles a CEO quite like a bruin of ruin — dividends mark one of the first places a company can grab badly needed cash.
Just ask loyal, longtime shareholders of General Electric Co. ( GE). Keeping the faith is a tall order when the company co-founded by Thomas Edison practically went lights out two months ago, slashing its once-mighty dividend to a penny. Again: One cent.
As recently as November 2017, the former dividend king had only cut its shareholder payout once since the Great Depression. Then came a shocking slash from 24 to 12 cents per share quarterly in December of that year. Today, GE’s share price hovers just north of $7.50 per share: down a stunning 76 percent since this time in 2017 and 22 percent since March 2009.
Thus, bear markets can yield uncertainty in an entirely different way. What some may interpret as a gutsy move from stodginess to pro-growth, others might see as mad dash to elude the bear’s grasp.
Panicked perceptions and irrational investor behavior aside, recent statistics offer some clue. Standard & Poor’s figures show that in the muck of the Great Recession, 2010, dividend growth bottomed out at negative 20 percent — its lowest trough since World War II. In the bull years that followed, it peaked at close to 18 percent and currently stands at 8.65 percent. That’s just below where things stood as the recession hit in 2008.
On the one hand, bear markets and recessions aren’t synonymous nor do they necessarily walk arm in arm. To be certain, 2019 doesn’t look to be a U.S. recession year, at least judging by an economic model created by the Federal Reserve Bank of St. Louis; it forecasts only a 0.24 percent chance.
Then again, St. Louis is a long way from Wall Street and the Fed’s headquarters in Washington D.C., where the last of four rate increases in 2018 made market watchers especially nervous.
“There are many signs that the economic cycle is over and it’s in fact time for investors to think about getting defensive — if they’re not already in that position,” Basmajian says. “Very recently, the 2-year, 3-year and 5-year Treasury rates all fell below the effective Federal Funds rate, a clear signal from the market that the Federal Reserve has made yet another mistake this economic cycle.”
[Read: How to Protect Your Dividend Income.]
So if indeed the bear has arrived, the general fate of corporate dividends will hinge at least in part on whether a recession follows, fast or slow. Still, prudent investors will not wait for such events to unfold. They’ll diversify their holdings, study each company based on its merits and not pay the pundits of perdition too much mind.
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How a Bear Market’s Awakening Affects Dividends originally appeared on usnews.com
