What Recession? – Week In Review

What Recession? The financial news contains stories about CEOs, hedge fund magnates, and economists predicting a terrible recession for the past several months. For instance, Paul Singer, the founder and co-CEO of the hedge fund Elliott Management says the

“…world is on the path to hyperinflation, which is the direct route to global societal collapse and civil or international strife. It is not baked, but that is the path that we are treading,” and

“But the current situation contains so many frightening and seriously negative possibilities that it is difficult to avoid the conclusion that a seriously adverse unwind of the everything-bubble is ‘baked.’ The world’s major central banks and political leaders are all trapped in a vise of their own creation.”

Paul Singer is worth billions, so his opinion probably carries far more weight than mine. But I will go out on a limb and say, “What Recession?”

Although inflation is still high, the Personal Consumption Expenditure (PCE) Price Index peaked in June at 7.0% and was most recently at 6.2% in September. Similarly, the Consumer Price Index (CPI) peaked in June at 9.1% and 8.2% in September. The values are not great, but they trend in the right direction, suggesting inflation is slowly moderating and not heading toward hyperinflation.

 

Jobs Growth Is Solid

The most recent jobs report indicated employers kept hiring, albeit at a slower pace of 261,000 in October. The unemployment rate ticked up to 3.7%, still near a record low. Jobs are still plentiful and easy to come by. For example, those employed in the oil industry are seeing a 0.8% unemployment rate, meaning anyone in the industry that wants a job can obtain one.

Recessions typically do not have unemployment rates near record lows. Furthermore, the third quarter Gross Domestic Product (GDP) was up 2.6% after two straight quarters of slight declines. 

 

Third Quarter Results Are Solid Depending on the Industry

Granted, tech is struggling, but unlike the dot-com crash, tech stock prices have dropped in 2022, and the global economy did not yet enter a recession. Other sectors and industries, such as Consumer Discretionary and home building, are facing challenges too.

However, other industries are benefitting. For example, banks are reporting OK earnings, buoyed by rising net interest income offset by lower trading revenue. Moreover, unlike the Great Recession, banks are not exposed to a significant amount of subprime mortgages, reducing risks.

Even packaged food companies and grocery stores are doing well with the ability to raise food prices, countering inflationary headwinds. Companies like Coca-Cola (KO), General Mills (GIS), Kraft Heinz (KHC), Kroger (KR), etc., are beating estimates and, in some cases raising outlooks. In addition, oil and energy companies are reporting record profits on high oil and natural gas prices.

That said, we may still get a recession if the consumer retrenches. But some CEOs are probably asking themselves, what recession? They may be waiting for one that has come and passed.

 

Stock Market Overview

The stock market had a negative week because the United States Federal Reserve raised interest rates yet again. The Dow Jones Industrial Average (DJIA) outperformed other indices continuing the trends for the year. As shown by data from Stock Rover*, the Nasdaq was down the most.

Only the Energy and Basic Materials sectors had positive weeks.

(Click on image to enlarge)

Weekly Stock Market Overview

Source: Stock Rover*

The Dow 30 is back in a correction for the year, and the S&P 500 Index is again in a bear market, like the Nasdaq.

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YTD Stock Market Overview

Source: Stock Rover*

Dividend growth stocks have performed relatively well, outperforming the S&P 500 Index and Nasdaq in all instances. The table below shows their performance by category.

Category YTD Return (%)
Dividend Kings (-8.2%)
Dividend Aristocrats (-8.3%)
Dividend Champions (-4.0%)
Dividend Contenders (-17.1%)
Dividend Challengers (-10.7%)

Source: Stock Rover*

 

Can the Fed Achieve a Soft Landing?

The Fed has stopped buying U.S Treasuries and mortgage-backed securities (MBS). It is reduced its balance sheet too. Lastly, the Fed has been raising interest rates. The bottom line is that liquidity is draining from the world’s financial system, especially when combined with the actions of other central banks. Their actions have caused an economic slowdown but not a recession. However, inflation is impacting the stock market because of interest rate increases and higher input costs. On the other hand, removal pos liquidity and interest rate increases are making the dollar stronger.

Can the Fed achieve a soft landing? Many economists say no. But after two-quarters of a slightly negative GDP, the classic definition of a recession, the United States has returned to growth. So, maybe they have, and I ask, what recession?

 

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 September 2022. As a result, the number of companies on the list has risen to 573. 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 Invesco Mortgage Capital (IVR), Steelcase (SCS), Sturm, Ruger & Company (RGR), and TPG (TPG).

 

Market Indices

11/05/22

Dow Jones Industrial Averages (DJIA): 32,403 (-1.40%)

NASDAQ: 10,475 (-5.65%)

S&P 500: 3,771 (-3.35%)

 

Market Valuation

The S&P 500 Index is trading at a price-to-earnings ratio of 19.61X, and the Schiller P/E Ratio is about 27.74X. 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. However, we are nearing the long-term averages. Earnings multiples of more than 30X are overvalued based on historical data.

 

S&P 500 PE Ratio History

SP500 PE Ratio

Source: multpl.com

 

Shiller PE Ratio History

Shiller PE Ratio

Source: multpl.com

 

Stock Market Volatility – CBOE VIX

This past week, the CBOE VIX measuring volatility was down about 1.0 points at 24.555. 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.

CBOE VIX

Source: Google

 

Yield Curve

The two yield curves shown here are the 10-year US Treasury Bond minus the 3-month US Treasury Bill from the New York Fed and the 10-year US Treasury Bond minus the 2-year US Treasury Bond from the St. Louis Fed.

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10-Year Bond minus 3-Month Bill

Source: NY Fed

(Click on image to enlarge)

Spread Between 2-Year and 10-year US Treasuries

Source: St. Louis Fed

 

Economic News

The ISM® (Institute for Supply Management®) Manufacturing PMI® for October reported at 50.2%, as business activity fell 0.7 points from September’s level, above most economists’ expectations and only slightly above the 50% threshold, indicating expansion. The Manufacturing PMI® figure remains at its lowest level since May 2020, when it registered 43.5%. The index for new orders remained in contraction territory, up 2.1 points to 49.2% from the previous month. Of the six largest manufacturing sectors, only Petroleum & Coal Products increased new orders at a moderate level. The Production index reported up 1.7 points to 52.3%. Of the top six industries, Computer & Electronic Products; Transportation Equipment; and Machinery expanded.

The Federal Open Market Committee (FOMC) announced raising its benchmark federal funds rate by 75 basis points, putting it in the range of between 3.75% and 4.0% — the highest level since January 2008. This is the sixth rate hike since March and the fourth consecutive FOMC meeting ending with a 75 basis point climb. Since March, the Fed has raised its benchmark federal funds rate by 375 basis points or 3.75%.

The U.S. Bureau of Labor Statistics reported 261,000 jobs were added in October, down from September’s upwardly revised 315,000. August and September job revisions combined for 29,000 added jobs – August was revised down 23,000, and September was revised up 52,000. The unemployment rate was reported to be slightly up to 3.7% from 3.5%. Job gains were relatively broad-based, with increases in healthcare (+53K), professional and technical services (+43K), manufacturing (+32K), social assistance (+19K), wholesale trade (+15K), and leisure and hospitality (+35,000). Payrolls dropped in warehousing (-20K) and real estate rental and leasing (-8.7K).


More By This Author:

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