The Fed Chair Throws Down The Hammer
Markets sent spiralling after the Federal Reserve warned investors of more "pain" ahead as they combat inflation
The Dividend Investor’s Edge is a weekly newsletter designed to give you, the investor, a better understanding on where the stock market is, and to better equip you with information to help you make more informed decisions.
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Each Week I will discuss:
• An update on the Stock Market To Date
• On The Horizon: A Look At The Markets Ahead
• 3 Quick Pick Ideas
• Notable Upgrades/Downgrades
• Dividend News
📈 Quick Look At The Markets 📉
As a reminder or for those of you new readers, in the “Quick Look At The Markets” section I plan to give you a recap on the S&P 500 as a whole as well as the sector Leaders/Laggards from the prior week. In addition, I will touch on volatility and fear in the market currently, which are important factors to consider when investing.
Well, everything shaped up pretty much how we expected when we warned in last weeks newsletter. The market had gotten ahead of itself and investors started thinking that a Fed pivot was possible.
Well…… it wasn’t and the markets sold off HARD!
The S&P 500 fell 3.4% and the Nasdaq fell 3.9% just on Friday alone. The Dow Jones Industrial shed over 1,000 points on Friday as well.
Let me try to explain what happened.
A few weeks back investors started fantasizing about a possible turnaround plan from the Federal Reserve. Right now we are in a period of tightening with RISING interest rates. Given that we saw inflation slow (Barely) investors started putting out the false narrative that the Fed had done its job and that they would in fact start CUTTING rates, which lead to investors buying up stocks.
Well, Fed Chair Jerome Powell made it plenty clear in his Jackson Hole speech, which we warned about last week, that the Fed would indeed stick to their plan.'
As such, stocks fell and they fell hard. The S&P 500 fell 2.6% on the week, but fell 3.4% on Friday alone. The Nasdaq fell 2.7% on the week, but fell 3.9% on Friday alone.
Volatility has returned and if we really start to think about it, the Fed is still in the early to middle innings of their plan. Quantitative tightening (QT), which is a monetary policy under the Fed in which they REDUCE their balance sheet, effectively selling off bonds.
This does a few things, it lowers the liquidity in the markets and drives treasuries lower, which increases bond yields (yields move opposite of prices). Higher yields mean lower valuations, especially for higher growth stocks.
The Fed has been increasing its fed funds rate for a few quarters now, but QT has just begun back in June. This means much of this policy is really not baked into much of the quarterly results we saw recently released. All this to say, the impact is expected in Q3 and Q4 earnings, so keep that in mind.
The Fed Funds rate, which is where the increase is happening when the fed “increases rates,” is currently at a range of 225-250. By the end of the year, economists believe we will see another 150 basis point worth of increases.
Here is a look at the heat map over the past week for the S&P 500. Year-to-date the S&P 500 is down 15.4%, after falling 3.4% last week.
Top Sectors For The Week
Energy +4.27% (Only sector in the green)
Worst Sectors For The Week
Information Technology -5.58%
Communication Services -4.82%
Consumer Discretionary -4.75%
Fear and uncertainty is often expressed in the stock market through volatility. One way for investors to understand where the market as a whole is at in terms of volatility is by monitoring the CBOE Volatility Index (VIX). The VIX represents the market’s expectations for near-term price changes within the S&P 500 index. The index is derived based on S&P 500 index options with near-term expiration dates, projecting a 30-day forward projection.
The VIX ended the week with a reading of 25.6 with the 50-day moving average finishing at 24.41. A reading under 20 is when I consider things to be closer to normal.
Here is a look at the VIX chart with the 50-day moving average:
Another resource you can look at is the Fear & Greed Index, which measures market sentiment based on the following seven factors: put/call ratios, junk bond demand, stock price breadth, market volatility, stock price strength, safe-haven demand, and market momentum.
When it comes the the Fear and Greed Index, things remained at a NEUTRAL rating. Currently, the index has a reading of 44, which suggests readers are once again becoming fearful of the markets. This reading comes after a split neutral rating last week when the index had a reading of 51.
📰 Stock Market: A Look Ahead 📰
In this section labeled “Stock Market: A Look Ahead” I will discuss a variety of different topics that face the market in the coming week(s) ahead. Remember that the stock market is forward looking , typically looking roughly six months ahead.
Looking at the futures at the time of writing this, we are moving towards a volatile session to start the week. Will we test the June lows, that is anyones guess, but I believe we did need that wash out moment.
I do not believe the recession will be deep, so the goal is to take advantage of large pullbacks in the market. Dollar cost average into some of your high-quality positions.
The next Fed meeting and rate decision is not until Sept 20/21, thus investors will be waiting a few weeks to see how strong the Fed continues to attack inflation. The next fed increase is expected to be between 50 and 75 basis points.
The August employment report will be a big piece of data for the Fed to digest, but the last report was strong and we expect the same for August.
Here are some of the key data/earnings releases this week:
Monday: Fed Chair Brainard speaks
Tuesday: Best Buy (BBY), Home Price data
Wednesday:ADP, plus two other Fed presidents speak
Thursday: Monthly vehicle sales, Manufacturing PMI, ISM manufacturing, Initial claims, Broadcom (AVGO)
Friday: Employment report for August
We are also approaching a short week with the Labor Day holiday next week, so volatility could slow in the later half of the week. As a reminder from last week, September has historically been one of the worst performing months for stocks, and that is just around the corner. Historically, the S&P 500 has declined an average of 1% during the month of September since 1928. Take this with a grain of salt.
With that being said, let’s take a look at our 3 Quick Pick Dividend Ideas.
💵 3 Quick Pick Dividend Ideas 💵
In this section, I will share 3 dividend ideas that are at the top of my watchlist. Please remember that I am not a financial advisor, so please perform your due diligence before investing.
Quick Pick #1 - AbbVie Inc. (ABBV)
This pick remains unchanged. I did not make any moves last week into ABBV as I was waiting for the Friday news, but if we see the down day we expect tomorrow, you can ensure I will be looking to add to my ABBV position. Again, all positions should be layered into when things are volatile and uncertain, such as they are right now.
I like to refer to ABBV as the “Dividend Trifecta.” An investment in AbbVie gives you the potential at:
Being that ABBV operates within the healthcare sector, which is known as a defensive sector, I expect to see them weather the storm if we do get a pullback in the markets.
The company has the best-selling drug in Humira, which treats moderate Crohn’s disease, but they will lose patent protection in 2023. However, although revenue growth will drop off in 2023, the company has been working at diversifying its portfolio of products to be a more all-around business.
A few years back, Humira accounted for roughly 70% of total sales, but today it is below 40%. Part of that is due to the slowdown internationally due to the international patent expiring, but also due to the growth in other drugs as well.
Shares of ABBV currently trade at a P/E of 10.1x and over the past five years they have traded closer to an average of 11.4x.
The yield is once again above 4%, which has historically been a good area to buy shares.
The company continues to grow its free cash flow, which is up 13.5% over the past 12 months. Free Cash Flow is where the dividend is paid from, so increasing FCF should lead to an increasing dividend.
Over the past five years, ABBV has increased their dividend at an average annual rate of 17.5%. In addition, they have increased their dividend every year since the company was spun off 9 years ago from Abbott Labs (ABT).
Quick Pick #2 - Prologis (PLD)
I am going to always try and sneak in at least one REIT into my 3 Quick Pick ideas, as I have always loved dividends. I like the total return aspect as well as the real estate exposure they add to my portfolio.
For those of you unaware, Prologis is one of the largest REITs around and they operate in the warehouse sector. Their largest client is Amazon.
Amazon made some comments in previouseviosu quarter about having “too much warehouse” space which was a comment that was overblown due to the context of the questions and answer that was being given. Amazon is in no way looking to reduce its warehouse space, in fact, they are looking to grow it. However, they are looking for newer more technologically advanced properties.
They want the best and brightest properties and that is exactly what Prologis offers.
Prologis currently trades at a P/AFFO of 31.2x, which is below their 5-yr avg of 33.0x. The company also pays a dividend yield of 2.5%
Analysts have a “Strong Buy” rating on shares of PLD with an average 12mo price target of $159, suggesting 24% upside from current levels.
Quick Pick #3 - Broadcom (AVGO)
Broadcom is a name I have long had on my list of stocks to add to. This might be the week to do it, but I caution you considering the company reports earnings on Thursday.
I will certainly be waiting to hear what management as to say and how the stock reacts prior to making moves, but this stock is at the top of my watchlist.
⏫ Stock Upgrades/Downgrades ⏬
In this section moving forward, I will add any notable analyst Upgrades or Downgrades I came across during the previous week.
Deere (DE) price target hikes from Wells Fargo to $423, Credit Suisse to $447, and Morgan Stanley to $424
Dollar General (DG) price target hike from Wels Fargo to $275 from $260
💰 Dividend News
In this section I will detail what I am watching and any Dividend related news.
Lam Research (LRCX) increased dividend by 15%
Altria (MO) increases dividend by 4.4%
Diageo (DEO) increases dividend by 48.6%
If you have not done so yet, definitely check out my growing YouTube community where I publish weekly videos on Dividend Stocks I am looking at.
Here is a look at one of my most recent videos covering 5 of the BEST Dividend Stocks TO Buy and Hold Forever. Give it a view and a LIKE here:
Here are a few other YouTube videos to watch:
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That concludes today’s newsletter. I hope you all have a great week and wish you the best of luck on your investing journey. Please let me know your thoughts on the newsletter down in the comments section below.
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Have a Great Week!