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.

Image: Dividend Power

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.

Source: Stock Rover*

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.

Source: OilPrice.com

Source: Freightos Data

Source: Trading Economics 

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.

The table below outlines price-to-earnings (P/E) ratio multiples and dividend yields of the Dividend Kings at three-time points.

Source: Dividend Power

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.

To quote Warren Buffett,

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*.

Source: 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.

Long-term data also answers the question of why dividends matter. Over time, it leads to higher returns with lower beta (volatility) with less variability of returns.

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.