The bear market is almost here! The Nasdaq is nearing “bear” territory; when an index falls over 20% from its high. It has been an absolute bloodbath out there with tech, industrials, and financials leading the collapse. In some cases, growth stocks are facing upwards of 50% in losses. This activity is largely in response to a hawkish Federal Reserve, trade wars, and geopolitical turmoil. However, much of this was expected. Last year, at this time, we were experiencing market euphoria. Fast forward one year later, and we’re experiencing the exact opposite.
Based on the data, a recession doesn’t appear to be coming anytime soon. The unemployment rate is 3.7%, household incomes are rising, and interest rates are still historically low. Consumer credit is healthy, and the banking sector is in a much better position than it was in 2008. There are some areas of softness but we are nowhere near a crisis at this time. And even though the economy will likely grow slower in 2019, corporate earnings are still expected to advance. Therefore, we are indeed experiencing the EXACT opposite of what we went through last year.
So essentially the selling is warranted but overblown. Panic selling is taking place on top of high frequency (computer) trading. It’s irrational in many cases. For instance, AT&T is trading at a P/E of 5 and now pays a dividend of 7%+. Even during a recession this valuation is inconceivable. This turmoil helps me illustrate why dividend investing is a winner in the long run. Even now, declines in my portfolio are only half the overall market. As of 12/20 the market was off by 2%. My portfolio was only down 1%. Stable, safe, dividend-paying companies help to minimize damage in these situations. Furthermore, reinvesting dividends allows us to buy more shares, leading to higher growth in the future.
My worst performers during this correction have been Apple, UPS, Target, Amazon, Exxon, and Phillip Morris. This makes sense given their connections to a potentially slowing economy. PM, on the other hand, is languishing from a strong dollar. In any case, I haven’t sold any positions and still plan on buying more as the market bottoms. In the meantime, current dividend yields have risen dramatically, and payout ratios are still reasonable. More importantly, over time, markets go up. So it’s best to keep a cool head and tune out the noise. Losers buy and sell on fear. Winners buy quality businesses and hold for the long run.
DISCLAIMER: I am long on AAPL, UPS, TGT, T, AMZN, XOM, and PM. I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.