Yield-thirsty investors eye stock dividends as virus fears shrink bond payouts By Reuters

© Reuters.

By Noel Randewich

(Reuters) – Battered S&P 500 stocks may get fresh interest from investors turning to dividends in a world of shrinking bond yields.

The dividend yield on the S&P 500 now exceeds the yield on the benchmark 10-year U.S. Treasury by its highest margin in nearly five decades after a flight to safe-haven assets compressed government bond yields to record lows.

Graphic: S&P 500 dividend yield vs 10-year Treasury https://fingfx.thomsonreuters.com/gfx/mkt/ygdpzdrzpwa/SPX%20Div%20Yield%20Take%20Five.png

Wall Street’s coronavirus sell-off has left the S&P 500 down 26% from its February record high, lifting its dividend yield to 2.46%, the highest since 2009, according to Refinitiv’s Datastream.

By comparison, investors’ rush to government bonds has pushed the yield on U.S. 10-year Treasuries to record lows, most recently on Thursday at 0.59%. Bond yields fall as prices rise.

With Treasury yields so low, “income-seeking investors should consider stocks with both high dividend yields and the capacity to maintain the distributions,” Goldman Sachs (NYSE:) recommended in a note to clients this week.

The bank’s report highlighted a list of 40 companies with comparatively high dividend yields, a long history of dividend payouts and stable balance sheets, among them Home Depot (NYSE:), Johnson & Johnson, Cisco Systems Inc (NASDAQ:) and Wells Fargo (NYSE:) & Co.

Historically, 10-year Treasury yields have almost always been higher than S&P 500 dividend yields, with a handful of exceptions since the 2008 financial crisis. At over 1.8 percentage points, the current spread between the S&P 500 dividend yield and 10-year Treasuries is the largest since at least the early 1970s, according to Datastream data, which does not go back any further.

Attractive dividend yields on Wall Street may not last, however. Goldman Sachs warned in its report that S&P 500 dividends are likely to shrink by 25% in 2020 as companies vulnerable to the economic shock of the coronavirus outbreak cut or scrap payments to shareholders.

Companies borrowing government money under a $2 trillion economic stimulus package approved last week are not allowed to repurchase shares or pay dividends until they repay their loans. Corporations including Boeing (NYSE:), Macy’s (NYSE:) and Ford Motor (NYSE:) have already suspended their dividends.

S&P 500 dividends in the March quarter reached a record $127 billion, up 8% from the previous year, according to S&P Jones analyst Howard Silverblatt. However, in the same quarter, a total of 13 S&P 500 companies reduced future dividends by $13.7 billion, including 10 companies that suspended their dividends, he said.

In another report, BofA Global Research estimated that in an extreme scenario in which troubled industries slash dividends to zero, the S&P 500’s overall dividend yield would fall by only about 9 basis points.

“We recommend high quality and safe – not high – dividend yield companies until credit conditions stabilize,” BofA Global Research wrote.

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He nailed the March coronavirus selloff — now he says there’s another 30% to go before the stock market hits bottom

Hedge-fund manager Dan Niles, in a note cited by Yahoo Finance this week, warned his clients way back in February that he was getting “increasingly worried” investors weren’t ready for the impact the spread of the coronavirus could have on the U.S. economy.

So Niles positioned his portfolio accordingly. Good thing. While the Dow Jones Industrial Average

DJIA, +0.33%

posted its worst first quarter ever, his Satori Fund closed in positive territory.

But, more importantly, where do stock markets go from? Definitely not higher, if Niles has it right.

“If you go back and look at history, there are nine times that the market has sold off about 30% or so since the 1920s, so it’s pretty normal,” he said this week. “You get one of these every 10 years or so and if you look at every one of them, you always get these bear market rallies.”

Nile told Yahoo Finance that he sees another major drop from here, pointing to valuations that are still hovering well above historical norms, even after the painful pullback.

“Just to get to average, you would have to have the market go down 30%,” he said. “It is very easy to figure out the market probably goes down 30% before we’re even near fair valuation.”

So, no bottom yet?

“I sort of laugh when I hear people talking about a V-shaped recovery because we are going to have at least 10% unemployment, my guess is closer to 20% before all of this is said and done,” Niles said. “You are not going to get a fast recovery with that many people out of a job and we’re not just talking in the United States. We are talking all across the globe there are problems that are happening.”

Nile explained that he’s still adding to his short positions, but he’s also going long in areas he believes to be resistant to the next batch of selling. He said he’s adding to his stakes in Activision

ATVI, +3.34%

, Take-Two Interactive

TTWO, +0.42%

and Amazon

AMZN, -0.40%


Check out the full interview:

Stocks came off their highs in Thursday’s session, with the Dow, S&P

SPX, +0.56%

and tech-heavy Nasdaq

COMP, -0.05%

all turning lower in afternoon trades.

Also read: Brace for the ‘deepest recession on record,’ says BofA analysts

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Outspoken Wall Street bond whiz says the stock market is acting ‘dysfunctional’ and may hit rock bottom once we take out March’s low

Jeffrey Gundlach on Tuesday said that the worst isn’t over for the stock market, after a brutal quarter that left the Dow with its worst decline in the first three months of a calendar year in its 124-year history.

Speaking during a webcast, the DoubleLine Capital founder said that the stock market remains “dysfunctional” from his perspective, indicating that the market may put in a more “enduring low,” once the March 23 nadir for stocks is “taken out.”

The Dow Jones Industrial Average

DJIA, -1.84%

 on March 23 finished at 18,591.93, its lowest close since Nov. 9, 2016, which left it with a pullback of more than 37% from its all-time closing high set in February. The S&P 500

SPX, -1.60%

, on the same day, ended at 2,237.40, its lowest close since Dec. 6, 2016, marking a nearly 34% pullback from its record finish.

From that point, the indexes then began a rebound that saw the Dow log its biggest three-day gain since 1931, and many strategists have speculated that the worst may be over for stocks after President Donald Trump last week signed the more-than-$2 trillion relief package and the Federal Reserve has rolled out a barrage of stimulus measures to ease gummed-up parts of the financial market.

Read: April poses crucial stock-market test as coronavirus promises ‘blizzard of bad news’

Gundlach speculated that the market could slide lower still. “I would bet that will get taken out,” he said, referencing the March nadir.

A day after the March low, the DoubleLine CEO speculated that the S&P 500 could jump to 2,700 before the coronavirus relief package was signed into law.

The S&P 500 hit an intraday March 24 peak at 2,637.01, but has mostly been retreating since then.

At the beginning of March, the Los Angeles bond-fund manager offered what turned out to be sage advice, recommending that investors stay in cash during the coronavirus pandemic.

He advised investors back then to pay attention to the economic data that will reveal the damage wrought by COVID-19, which has so far caused a near-global shutdown as governments across the world attempt to mitigate the spread of the deadly infection, which has been contracted by more than 850,000 people and killed 42,000 so far, according to data compiled by Johns Hopkins University.

Gundlach said watching the direction of weekly U.S. jobless claims data, along with consumer confidence, could be helpful in seeing how households — the linchpin of the economy — are holding up.

Weekly jobless claims reported on Thursday were the worst in history, surging to 3.28 million people seeking unemployment benefits.

On Tuesday, Trump attempted to underscore to Americans that the road ahead will be a tough one, noting that we are facing a “very, very painful two weeks,” during a daily coronavirus news briefing. “This is going to be a rough two-week period,” the president said.

On Tuesday, stocks, slammed by uncertainty surrounding the illness, ended sharply lower, with the Dow marking its worst quarterly performance since 1987, the S&P 500 index marking its sharpest quarterly fall since 2008 and the Nasdaq Composite Index

COMP, -0.95%

  notching its worst quarterly slide since the fourth quarter of 2018.

Read: Only one stock in the Dow rose during the first quarter — and it was up by only one penny

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Stock investors are too optimistic — they’re running up Abbott, Johnson & Johnson and General Motors without doing any research

We all want the coronavirus to die off. It is the government’s job to spin reality to keep up the country’s morale. It is the prudent investor’s job to discern the truth.

The key questions for investors are: Where is the bottom in the stock market? Should you buy or sell stocks now?

Let’s examine with the help of a chart.

Please click here for a chart of the Dow Jones Industrial Average ETF

DIA, +0.90%,

which tracks the Dow Jones Industrial Average

DJIA, +0.95%.

Note the following:

• Look at the last bar. After touching the top band of the mother of support zones, the stock market has moved above the top band of the support/resistance zone. From a technical perspective, this shows significant optimism in the face of worsening coronavirus news.

• The chart shows that RSI (relative strength index) is nowhere near the level shown at the last major bottom. This indicates there is significant risk in this market that investors are underappreciating.

• The chart shows the Arora call on Jan. 22 that the coronavirus could cause problems for the stock market. This call was repeated on Jan. 30. Meanwhile, the S&P 500 Index

SPX, +1.39%

was on its way to new high Feb. 19.

• When the Dow was in 16,000-point range, I was calling for the index to reach 30,000 while President Trump was in office.

• When the Dow reached almost 30,000, I didn’t raised my target. It was not because I knew the coronavirus would come along, but because our adaptive ZYX Asset Allocation Model was keeping us cautious.

Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.

Where’s the bottom?

The mother of support zones has an 80% probability of holding — this along with RSI should be the main reference points to look for a bottom. There is simply too much optimism in the stock market, and in many cases investors are buying without doing research.

Here are a few examples:

• Abbott Laboratories

ABT, +8.13%

has come up with a coronavirus test that takes five minutes. The revenues from the coronavirus test will dwarf those that Abbott is likely to lose due to issues related to coronavirus. Investors are running up the stock.

• Johnson & Johnson

JNJ, +6.76%

is making great progress on a coronavirus vaccine. Johnson & Johnson is likely to sell the vaccine at cost. This will have no material increase in earnings. Investors are running up the stock.

• General Motors

GM, -0.26%

will make ventilators. It is selling them at cost, so they will have no impact on earnings. Investors are running up the stock.

• Medtronic

MDT, +2.79%

makes ventilators, which are a small portion of its business. At the same time, Medtronic is suffering because its sales are likely to drop due to the postponement of non-essential surgeries. Investors aren’t seeing the whole picture. And, yes, they are running up the stock.

The foregoing shows that there is simply too much optimism. Investors aren’t able to judge correctly. In my 30-plus years in the stock market, I have never seen investors behave this way. To decide on buying or selling, use an objective framework. Please read “Stock market investors are asking ‘should I buy or sell?’ Here’s how to decide.”

Answers to your questions

Answers to some of your questions are in my previous writings. You can access them here.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.

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The Dow marked its 2nd straight gain — but Thursday jobless claims may pose the stock market’s biggest test amid coronavirus

Jobless claims haven’t been a focal point for investors for more than a decade, but market participants will be keenly watching Thursday’s figures because they could provide the clearest sign yet of the damage wrought by lockdowns that have swept across much of the U.S. to mitigate the spread of the COVID-19.

“’How will the markets survive the U.S. initial claims going ballistic?’ is probably on everyone’s minds this morning” wrote Stephen Innes, chief global markets strategist at AxiCorp.

Check out: Jobless claims set to soar by the millions as layoffs surge due to coronavirus shutdowns

Market participants are bracing for a number that could run into the millions — figures that are likely to bring to an abrupt end the first win streak for the Dow Jones Industrial Average

DJIA, +2.39%

and the S&P 500 index

SPX, +1.15%

since early February.

With one out of every five Americans under some form of stay-at-home measure to help lessen the spread of the illness that was first identified in Wuhan, China, in December, some economists are anticipating that as many as 5 million workers will show as applying for unemployment insurance in the coming weekly report. It is a staggering number that some market participants say is too large to discount and one that will likely knock the air out of a market that is searching for its footing higher.

See: 23 million American jobs in immediate danger from the coronavirus crisis

“We realize freakishly bad economic data is coming,” wrote Fundstrat Global Advisors’ Tom Lee in a Wednesday research note. “On Thursday, some economists are projecting weekly jobless claims to surge to as high as 5 million,” he wrote.

“Many of our more active and tactical clients are short into this, arguing that such wildly bad news cannot be discounted and thus, this ‘tape bomb’ should lead to a big sell-off,” he said.

On Tuesday, BTIG analysts Julian Emanuel and Michael Chu said that if a $2 trillion coronavirus rescue package being voted on by lawmakers late Wednesday wasn’t approved by the time those gut-wrenching numbers come out on Thursday, it would likely knock the wind of the market’s sails.

The BTIG researchers wrote that the “psychology of such a large weekly claims number without a deal done will inflict incrementally larger damage” on an already fragile market.

The Senate late Wednesday approved the relief bill, which is designed to shield the economy from the pandemic that has halted normal business and personal activity.

“The problem is new jobless claims will measure the extent of U.S. policy failure, and with the Congress dilly-dallying, it will not help the matters,” wrote Innes.

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