High Dividend Yields Could Start Attracting Big Investors Back Into the Stock Market. Major stock declines have raised dividend yields to levels investors haven’t seen in years. As as result, we believe, could be a trigger for some major institutions to return to the markets to buy high-yielding stocks that they perceive now have become oversold by the recent Corona-induced rush out of equities. Below is a chart of earnings yield+dividend yield-treasuries starting to show value.
The chart below from SentimenTrader shows that there haven’t been as many S&P 500 stocks with dividends of 5% or more since the 2008 financial crisis.
The chart below we created with Adam Newar of Eden Capital shows the ratio of dividend yield to Treasuries is among the most attractive in 50 years. Something positive that could start to signaling a potential bottom as the result of the recent major declines.
Major Risk Indicators Showing Historic Level of Investor Outright Panic Over Economy and Stock Market. SentimenTrader has combined a number of risk indicators that measure perceived economic, stock market, monetary liquidity, and perceived credit risk of the global financial banking system. As the chart below shows the coronavirus and its perceived impact has sent the level of panic to a record high going all the way back to at least the recession of 1960. The indicator incorporates the TED Spread, Junk Bond Yield Spreads, a ratio of Volatility to 3-Month Treasury Bill Yields and High-Yield CDS Spreads. All of these spike higher when uncertainty about the economy, corporate outlooks and stock prices are high, and reach extreme high levels only during times of outright panic. For example, the TED spread, which shows perceived risk to the global banking system, is the difference between the three-month T-bill rate and the three-month London Inter Bank Offered Rate (LIBOR). The high yield CDS spread indicates the price investors have to pay to insure against companies defaulting. As perceived default risk rises, so does the spread (cost) of the CDS.
Escalating High Yield CDX Index Spread Shows Things are Getting Really Ugly. In good times the spread between the High Yield CDX Index and Treasuries narrows. That’s because lots of investors are very confident in the state of the economy to buy high yield bonds despite their below-grade ratings. However, as the chart below shows, in times of financial crisis the spread spikes sharply as investors run for the hills, fearing the worst. The fact that the spread is a now lofty 592.91 6% is an indication of how bad things are becoming. You’ll note the present spread is even higher than the periods around the financial crisis around 2012- 2013 and 2015-2016.
Watch Out! Bear Markets are Extremely Volatile and Bear Traps For Unsophisticated Investors. The charts below of bear markets going back to 1929 show they are marked by extreme volatility with sudden surges amid longer term downward moves. If we have now entered another bear market, this kind of volatility can result in major losses for unsophisticated investors who have been conditioned to believe over the last few years that the only direction is up. For the more sophisticated traders, there is a trading technique known as “buy on the dips and sell on the rips.” In other words, buy on weakness and sell on strength. So, pullbacks as we’ve recently experienced may provide chances to buy extremely oversold stock. However, investors also need the discipline to forsake greed and sell as the markets surge higher, but before the rips convert to bigger dips. For the less disciplined, which historically means most investors, defensive action is the watchword.
You’ll be wishing the short Sellers were still here. On Monday global stocks suffered one of the worst drops in the last 10 years. The one-day loss ranks as the fifth-biggest for the decade.
Of course, the market has bounced back from previous scares. Federal Reserve tapering, BREXIT, and the volatility disaster didn’t keep stocks down for long.
But the recent virus scare comes at a fragile time for U.S. markets.
We are in the longest bull market of the last century. I’m willing to best that makes it the longest in your lifetime.
That’s quite the move over the past 10.9 years. Almost straight up. Barely a squiggle on the path to new highs.
Under the surface though are concerns. Big concerns.
For one, fundamentals are starting to worsen. As I’ve mentioned in numerous previous articles, gains in technology stocks, for example, have been driven entirely by valuation expansion. That’s not sustainable.
Corporate guidance is starting to turn down.
The chart shows quite a plunge from 2017 to today. We are at the lowest levels since 2015. Could it go lower? You betcha!
The impact on the economy for Coronavirus can’t be waived aside. China’s growth may fall from 6% to 4.5% on the virus alone. That’s a huge percentage move.
In addition, when SARs was raging, China was growing almost twice as fast. Since then growth has slowed and debt levels have ballooned.
I see the impact in my own life. I’ve been fortunate to travel all over the world. But I’ve never been to Italy. Over the past 15 years something seems to have popped up each year. Mostly I have traveled somewhere else instead.
Just a few weeks ago I was making plans. Now they are on hold.
Coronavirus just exploded in Italy in the past few days. I’ll wait and see what happens, but I’m not going there to spend money on airfare and sightseeing and most likely neither is anyone else.
These type of travel disruptions represent just one of many strains on the global economy that will continue to ripple as the virus spreads to more countries.
Companies will be cautious. This comes at a time when revenue growth is slowing and profit margins have peaked. Tax cuts have come and gone. Stock buybacks are slowing. Buybacks have been a major driver of stock returns.
While stocks have hit new highs, short sellers have been blown out. It might be fun for people to cheer the demise of short sellers. After all, they’re un-American, right?
I started shorting stocks in 2000. Back then, you could fill several pages of dedicated short sellers. Today you could fit in on a postage stamp. There’s barely anyone left.
Short interest on the S&P 500 ETF has nosedived. It’s now at the same levels we saw just before the ass kicking that resulted in the Great Recession.
The difference is there’s very few shorts left. Shorts are buyers of stock in a panic. They’re covering stock and booking gains. Shorts provide a floor for stock prices.
What happens when no one is left?
Ugly. Very ugly.
I don’t know if Coronavirus is the catalyst for a big decline in the markets over time. The market has ignored other concerns that have popped up over the last decade. I do know that another bear market will come. When it does, the combination of complacency, weak fundamentals, and few short sellers left in the game will lead to a bigger than normal butt whooping.