stock market rebound on the horizon
Despite a gloomy investor sentiment, there's reason to believe that the worst is behind us and dividend stocks are poised for a rally.
First off, seasonality is on our side. Historically, the S&P 500, a collection of the 500 largest U.S. listed companies, has shown the same performance as it does at present, rising until mid-September before taking a break in the fall. The final months of the year, however, often see another significant upturn. If the S&P 500 follows this pattern in 2023, investors have a pleasant few weeks ahead.
Investors also draw attention to the fact that share prices in the U.S. tend to rise in the year before the next presidential election, which is set for November 2024. An average chart of the S&P 500 for the past 96 years supports this argument. However, there's a caveat: although this theory holds true for the overall year, it doesn't necessarily apply to the final months. In most pre-election years, the price increase takes place until around August, followed by a sideways movement.
Another bullish argument for Wall Street is the substantial number of institutional investors holding a bearish outlook on the stock markets. Hedge funds, in particular, have been betting on declining stock prices and have recently been modestly invested in equities. However, if the stock market suddenly turns upward, which it did following the Fed's decision to leave key interest rates unchanged for the time being and not raise them further, institutional investors will have to adjust their strategies. They will be forced to cover their short positions to avoid further losses, which in practical terms means they'll have to buy the shares they've been betting on falling.
From a fundamental perspective, the stock market glass appears to be half full rather than half empty. That's despite the U.S. economy registering an impressive 4.9% growth in the third quarter on an annualized basis—a sign that might motivate central banks to introduce further interest rate hikes. However, the labor market has recently shown signs of exhaustion. In October, only 150,000 new jobs were created outside the agricultural sector—a figure lower than economists had predicted. Furthermore, the figures for August and September were revised downward by a total of 101,000 new jobs. The unemployment rate inched up from 3.8% to 3.9%. When fewer people have jobs, there's less money for consumption, a major driver of the American economy. Finally, hourly wages rose just 0.2% in October, less than expected, which could suggest a slowing in economic momentum.
Valuations have normalized after a correction in the summer, with U.S. share price/earnings ratios now more reasonable than they were before. The price/earnings ratios of American shares are higher than those in Europe, but this historic disparity is almost always the case. Moreover, the U.S. economy is performing more dynamically than that of Europe, being less affected by geopolitical flashpoints and less reliant on the Chinese economy.
If investors find themselves with a luxury problem, wanting to invest 25,000 euros, they might consider investing as follows. Equities, particularly dividend stocks from the consumer staples sector, would be the preferred choice. Tech stocks and corporate bonds with medium maturities also seem attractive, offering yields in the vicinity of 4%. Gold is worth inclusion in every portfolio as a basic investment, with an allocation of around 10% deemed appropriate. How much money should be divvied up between stocks and bonds depends on each investor's risk tolerance.
Michael Wittek, the head of portfolio management at Albrecht, Kitta & Co., suggests these investment choices. The Fed's decision to leave interest rates unchanged has sparked a turnaround in stock trading, prompting institutional investors to reconsider their short positions.
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Factors that may contribute to the belief that dividend stocks will rise include:
- Economic Recovery: Strengthening economies, particularly in sectors that historically perform well during such times, can lead to higher corporate profits and consequently, larger dividend payouts.
- Monetary Policy: Central banks' accommodative monetary policies, such as low interest rates, can make it easier for companies to issue debt and potentially increase dividend payouts.
- Corporate Health: Companies with strong balance sheets and stable cash flows are more likely to maintain or raise their dividend payments, especially when they have a history of doing so.
- Regulatory Environment: Changes in regulatory environments that favor dividend payments or reduce the tax burden on dividends can contribute to the belief that dividend stocks will perform well.
- Investor Sentiment: Positive investor sentiment, driven by factors like low valuations, high yields, and a desire for income in a low-interest-rate environment, can impact beliefs about dividend stocks.
