This Friday’s 530 point drop in the Dow brought to a close a very rough week in the stock market. Indeed, for those of us who tend to focus on dividend paying stocks, the entire past year has been pretty challenging as this normally stable asset class has fallen out of favor, leading many investors to question as to whether they should be in stocks at all.
It’s completely natural to question your judgment in times like these, and on days like Friday, perhaps even your sanity. After all, didn’t we just go through this? Didn’t we all just get wiped out in the big drop? Isn’t this going to be the same thing all over again?
It’s times like these that I start to recognize the benefits of growing older. Not only do I save money on shampoo (due to a much smaller amount of hair), save money on electricity (because the lights go out much earlier than they used to), but I have earned the experience to look at markets like the one we are currently in and say, “We’ve been here before”.
To answer our opening questions: No, we didn’t just go through this. The last market correction of any significance happened in 2011, four years ago. The equity markets have been on a relatively smooth and steady climb since then. Also, no again. We didn’t all get wiped out. In fact, even investors who just held the S&P index have not only recouped what they lost, but added 25% to the value of their investment since the peak in 2007 – eight years ago. Indeed, if this is the same thing all over again, we should have learned our lesson and be ready to take advantage of the market conditions.
The current market action feels strangely like 1994, when I was just 2 years into my investment advisory career. As a young broker, I eagerly cold-called unsuspecting people at home, interrupting their dinner (or whatever else they were doing) to make sure they knew about the latest stocks my employer was promoting. As annoying as cold-calling was, I was actually pretty good at it and found several new clients, some of whom are still with us today. As a rookie broker (and still today), I tended to stick to larger companies with big dividend streams, focusing on quality and income rather than explosive growth. As a result, US West, then the local telephone utility, became the largest holding in my client’s portfolios. At the time, US West had a dividend yield approaching 6%, which I felt would help investors through any market downturn by providing a constant income stream. For those of you who perhaps don’t recall, the Fed cut rates from 1990 to 1992 (all the way down to 3%!), and the economy was just at the beginning of an expansion and holding steady in 1993. However, late in 1993 it was clear the economy was improving, and the market began to worry about higher interest rates.
With these interest rate jitters came investor concern in the dividend paying utility stock index. In fact, the Dow Jones Utility index started a significant slide in the fall of 1993, and the Fed didn’t even raise rates until February of 1994. Over a series of raises of 0.25% to 0.50%, the Fed continued to raise the fed funds rate up to 6% in 1995. The Dow suffered a sharp 10% decline, dropping from approximately 4,000, to 3,600. Junk bonds had a major fallout (pounding big-name hedge funds like Askin Capital and Steinhardt Partners) and mortgage backed derivatives began to take out names like Orange County, CA. My beloved US West position went from ending 1993 at a high of $45.88 to closing 1994 at $35.63, a drop of 22% in price. However, that dividend check came in every quarter, and we continued to use the price drop to accumulate more shares.
Given the fact that the Fed embarked on a two-year rate hiking spree, you might assume that dividend paying stocks continued to fare poorly. However, the utility index bottomed in the fall of 1994 and began a 6 year bull-run, peaking in November of 2000. Our US West was purchased for cash by Qwest at $72/share, fully doubling from our 1994 low, and paid a dividend all the way.
Looking at today’s market with the benefit of my 1994 experience in hand, I see many similarities. We’ve seen a large divergence in the performance of dividend paying stocks, as the chart below shows. The yellow line depicts the highest dividend paying quintile of US equities, and the performance of the other 4 quintiles. Clearly, dividend payers have been having a rough time for most of the last year. The utility index started a slide in January of this year, and my friend David Rosenberg with Gluskin Scheff recently described the junk bond market as “Having a Coronary”.
While many may look at this convergence of events with concern, my experience tells me that we should be doing the exact opposite: this is a time to be looking for opportunities. In fact, it may be time to take a few of those dollars I’ve saved on shampoo and start looking for values in the stock market. Clearly, an indiscriminate decline like what we have seen this week has lowered the prices on many great companies, many with large dividends. While volatility like this can lead to further declines (and Monday may well be a mess), the value created for investors is tempting. Rest assured that your Cascade Team is evaluating the opportunities every day, and we will be actively working to take advantage of the continuing volatility for the benefit of your portfolios.
Obviously, volatility can be unnerving. Please do not hesitate to call your Cascade advisor to discuss your individual situation, and to re-gain the confidence that you are on the right track.
Enjoy the rest of your summer!
Plan Wisely-Invest Confidently-Enjoy Life!