For the fourth week in a row, the averages of the major US stock markets have been brutally beaten. The S&P 500 index fell 3.3% on the week and ended April with an 8.8% drop, the worst month for the index since March 2020, and tied with the tumultuous month of October 2008 during the darkest days of the financial crisis. The S&P 500’s highest close of the year was on January 3 and since then it has fallen 13.5% over the past four months.
Equities face many challenges, in particular rapidly rising inflation and interest rates, and emerging signs of slowing economic growth. Thursday morning’s Commerce Department report on gross domestic product for the first quarter showed a startling 1.4% contraction in economic output, led by lower government spending and an increase in imports. On Friday, the Labor Department reported that the personal consumption expenditure price index rose 6.6% year over year in March, the biggest increase in 40 years.
Short-term interest rates are climbing ahead of a 50 basis point rate hike by the Fed at the Federal Open Market Committee meeting on Wednesday, and several more large-caliber hikes in the months ahead . Meanwhile, long-term rates have remained relatively stable over the past couple of weeks, causing the yield curve to invert, a widely observed phenomenon as it is often a precursor to recession – and a yield environment that is the bane of the banking industry, in which funds are borrowed short-term and lent longer-term for things like mortgages and car loans.
No sector was spared from the massive sell-off, but the two that lost the least were technology (-1.2%) and energy (-1.4%). Among those that were most affected, telecommunications (-8.2%) and consumer discretionary (-7.4%), real estate (-5.3%) and financials (-4.6%) didn’t fare much better. Even utilities suffered a 4% scalping.
The only non-negative entry in the “Since April 22” column of the table above is iShares MSCI Emerging Markets (EEM 0.00%), which broke even for the week. Large-cap Chinese stocks are among EEM’s largest holdings, and iShares China Large Cap (FXI +4.9%) had a positive week. Other emerging markets such as Brazil (-5.7%), Mexico (-4.0%) and South Korea (-1.3%) were not as buoyant.
Fear and greed flock to discipline and valor in Omaha
Like a Super Bowl or a Grateful Dead spectacle, throngs of Berkshire Hathaway shareholders from Bill Gates to Bill Murray flocked to the company’s annual meeting this weekend in Omaha, Neb. Many came to pay tribute and glean ideas from the men who made them rich: Berkshire President Warren Buffett, who turns 92 in August, and his 98-year-old best friend, Vice President Charlie Munger.
Buffett became a billionaire by applying the rules of value investing he learned from his professor at Columbia Business School in the early 1950s, and his eventual business partner at a fund management company. Benjamin Graham, the “father of value investing,” emphasized buying fundamentally sound companies when the market offers them irrationally large discounts to their intrinsic value. In his 1949 book, The smart investor, Graham describes a manic-depressive man named “Mr. Market” who is always willing to buy or sell stocks with you, but the prices he offers waver and reflect his extremes of pessimism and euphoria. A popular quote from Buffett advising to be afraid when everyone else is greedy, and to be greedy when others are afraid stems from the teachings of his mentor.
Fear goes up a notch
For what it’s worth, Buffett hasn’t been greedy lately, with $144 billion of dry powder parked in Treasuries, but there are certainly signs the market is saturated with fear – talking heads on cable television to news readings of investor sentiment.
The American Association of Individual Investors conducts a weekly AAII sentiment survey of its members, and the share of investors identifying as bulls fell to 16.4% last week, falling below 20% for the 35th week only in the past 35 years. Bearish sentiment jumped to 59.4%, the highest levels since March 2009 and one of the 10 highest on record since the survey began in 1987.
AAII is a great organization that provides exceptional educational resources and opportunities to learn how to invest successfully, and the members I’ve met are all smart people, but the survey has traditionally been used as a contrarian indicator to identify extremes in sentiment that tend to precede the market. turns. The idea is that when everyone crowds on one side of the boat, the other side tips over.
Put-call ratios are popular indicators of sentiment in the options market, and they also record extreme readings. Traditionally, the higher the put-to-call ratio, the more bearish the outlook for options players in that market. Ratios greater than 1.0 correspond to high fear. The CBOE’s total put-to-call ratio ended this week at 1.33, its highest level since March 2020, the month the market crashed at the start of the pandemic – and just before the onset of the huge rally less than a month later.
There is certainly no guarantee that the market will rise simply because of imbalanced bets in the options market. In fact, the last spike above 1.2 on the put-call ratio at the start of this year was not a rally at all, with the S&P 500 falling in three of the following four months.
Make moves as Mr. Market gets moody
There are seven new additions this week to the Forbes Dividend Investor portfolio, but they all have limit buy prices set significantly below Friday’s closing prices. The upcoming dividends help sweeten the pot for three of these stocks, all of which trade at prices below historical valuation multiples and have demonstrated the ability to maintain their dividends.
Intel trades ex-dividend this Thursday, May 5 for a quarterly payout of $0.365 per share. Even though the chipmaker reinvests $0.26 of every dollar in sales into capital expenditures, like building a new semiconductor foundry in Ohio, it still managed to generate cash flow. available of $2.36 per share over the past 12 months, which is more than enough. to cover annual dividends of $1.46 per share and to maintain 6% annual payout increases, as has been done over the past decade.
Intel is trading at a 21% discount to its five-year average price-to-sales multiple, based on sales for the coming year. Even with lower forecasts for future quarters, this year’s revenue is expected to grow 0.73% over 2021 figures. Intel’s enterprise value to EBITDA multiple of 6.6 is 8.6% below its five-year average of 7.2. Guys like founders Gordon Moore and Andy Grove may no longer be at the helm, but the folks running Intel have successfully led the solid-state supertanker since 1968.
Sharing a May 5 ex-dividend date with Intel is a flat steel producer Ternium
Our seven newly added stocks look cheap, but current market conditions suggest it wouldn’t be shocking to see them trading at their respective limit prices shown in this week’s report. Forbes Dividend Investor wallet.
To see the buy limit prices of these seven new dividend stock recommendations, and to access the full Forbes Dividend Investor walletClick on here to start your risk-free 90-day subscription to Forbes Dividend Investor. Forbes Premium Income Report, is an advisory service that sends two option-sell trades using dividend-paying stocks as the underlying securities every Tuesday and Thursday afternoon. Both newsletters are written, edited and produced by John Dobosz, author of this article.
Las Vegas Moneyshow Presentation Schedule: If you plan to be in Las Vegas on May 11-12, I’d love to meet you at Bally’s Hotel & Casino for the Moneyshow, where I’ll present some stock ideas and our strategy for finding undervalued dividends and put options on them to generate additional income. Save 20% on admission using the SPKR20 discount code when you register.
Stocks to buy (or sell) in the coming months: Wednesday, May 11, 2022 | 10:00 a.m. – 12:00 p.m. PDT
Extreme Equity Income: Wednesday, May 11, 2022 | 2:30 – 3:15 p.m. PDT
If more than one of you show up for the 2:30 p.m. presentation, I will offer the first 15 of you Topgolf, which is just 1 km from Bally’s, and a much more pleasant environment to chat. We will have long drive and chipping competitions, with free six month subscriptions for the top two finishers in both categories.
If there are more than 15 of you showing up at the driving range, that would be great. You will have a wonderful time, but you will have to pay your own way. You can, however, deduct anything you pay from the regular cost of subscribing to any of the Forbes‘ newsletter offers. Hope to see you in Las Vegas.