In merely 3 weeks’ time the world equity markets on average have erased 27% of their value, some markets lost more, others less. But the equity market rout has brought back value for several sectors and for multiple stocks. The question is whether they have become cheap enough. But what is cheap these days ? Compared to bonds, stocks are dirt cheap. However, looking at the cyclically adjusted price earnings metrics, they are not. Or not yet. The good news is that they are no longer expensive. As indicated before, it now comes down to trying to gauge the future earnings growth. That might be anyone’s guess.
But what seems pretty clear to me is that when markets are down 30% from the peak, you need more than 40% to claw back to the top. An overview for the S&P500 drawdowns shows that in the past it took quite some time to get back to the previous high. And as long as investors do not have a clue about future earnings they cannot possible correctly estimate what the right multiple for markets will be. What is clear however is that investors do know which companies have sound balance sheets and have a very good chance to pay its dividend, keep it stable or either increase it. Looking back at 2008, some indices for the REITs markets recouped their losses far more quickly than the average market or other sectors where dividends were cut.
One cannot help but believe that professional investors have already made up a target list with favorite stocks. Clearly, at this point in time the better part of the total return for equity will come from the dividend. Unless, you believe in a very strong V-shaped rebound. But sustainable dividends are going to be key to make up for some of the losses. And hence, it’s all down to quality. And do not get carried away by optically high double digit dividend yields. Most of them could simply flash trouble ahead. Today, stocks with rock-solid mid-single digit dividend yields have become easier to find. Be it better quality banks, luxury brands, REITs, etc..
It would be nice to get a strong V-shaped recovery, once the virus frenzy ends. But a slow U-shaped recovery or even worse an L-shaped recovery cannot both be ruled out. In such a scenario, banking on high-quality dividend stocks look to be the better choice.
Meanwhile stay safe and sound, and don’t worry about Friday the 13th..