By: Dividend Sensei
Click here to read up on the intro to this portfolio, the theory behind it, and its methodology.
Weekly Economic/Market/Earnings Data Review
Last week the S&P 500 rose 0.73%, on a rather quite week for economic news. The market is now up 9.12% for the year, and 1.53% below its all time high.
The good news, is that jobless claims came in at just 234,000, and the trend continues to be downwards. Meanwhile the latest JOLTs report shows a record number of job openings, so little concern that the age of the economic expansion is about to trigger a recession. Most importantly at some point this trend should result in higher wage growth.
Meanwhile industrial activity in railroads and chemicals continues to increase, though Hurricane Harvey may result in a bried pull back given how badly Texas’ petrochemical and refining industry has been hit.
Mortgage delinquencies continue to decline and are now under 1%, the lowest since early 2008 (before the housing crisis hit its stride). That’s not surprising given that housing prices have risen, and steady growth in jobs and real wages (due to low inflation) means that the number of people underwater on their mortages is very low, so less reason to walk away and hand the bank the keys.
And while individual company earnings matter little to long-term investors, when looking at the S&P 500’s overall latest earnings season we can see a very nice return to both top and bottom growth. In fact, the strongest in about six years.
In addition, thanks to such strong earnings growth, the S&P 500’s trailing 12 month dividend growth rate is now 6.2%, slightly above its 20 year median of 5.9% continuing a positive trend for the last two quarter and indicating that investors are enjoying 5% higher than normal dividend growth.
Given that consumer spending, driven by slightly disappointing wage growth, hasn’t been that great, this is a potentially positive sign that the market may yet avoid the kind of big crash that many investors fear.
After all, if the labor market continues to improve, than at some point real wage growth will hopefully rise above its current 0.8%, and combined with a more deleveraged consumer, spending could finally increase, and drive even better revenue and earnings growth in corporate America.
Of course, that’s not to say that even in such a optimistic scenario we should expect the market to rise at double digits for another few years. Rather it might simply mean that the market rises slower than earnings for a few years to allow valuations to drift lower.
If that is indeed what happens, and it would represent a best case scenario for pretty much everyone (investors, pensions, the Fed), then dividend stocks will once again be your best bet for achieving market beating returns.
There was some bad those, specifically in that weaker than expected housing data caused both the New York and Atlanta Fed’s to downgrade their projected Q3 economic growth.
Atlanta GDP NowCast: 3.4% growth vs 3.8% last week.
New York Fed NowCast: 1.9% growth vs 2.1% last week.
What matters isn’t the exact figure, but the trend. As usual I expect Atlanta’s optimistic figure to drift lower as the quarter progresses. The question is whether or not New York’s estimate remains stable at around 2%, or also declines.
While 2% economic growth is not anything to get overly excited about, it’s also a solid base from which we can continue to heal the labor market, get wages moving up, spur spending, and finally capital investment (once our industrial utilization rate improves from its 77%).
Meanwhile more good news is coming in, specifically in the form of continued low risks of recession, declining inflation expectations (lower rates for longer), and a rising equity risk premium.
That last one means that it’s becoming more profitable to invest in stocks (despite high valuations), compared to risk free Treasury Bonds. Of course that’s a very broad measure, and it pertains mainly to low cost market index funds.
Our goal is to beat that courtesy of selecting undervalued dividend growth stocks with safe and growing payouts.