Stocks rallied yesterday in a low volume session spurred by a strong showing in Consumer Confidence. Bonds climbed and yields pulled back slightly giving growth stocks a chance to catch their collective breaths.
What’s in your hand? There are some plain-in-sight things which we should not ignore. The first one that comes to mind is… well the yields on US Treasury Bills, Bonds, and Notes, collectively BONDS, for those unfamiliar with the specifics. The real value is in the front end of the yield curve these days. That means shorter maturities. With the currently inverted yield curve you get a higher return on shorter tenors than longer. A 1-year Treasury Bill, WHICH IS A TYPE OF BOND, yields 4.52%! That 4.52% will be paid to you by the US Government on November 30th of next year. You can count on that! Do you know where stocks will be next November 30th? Will they be higher than they are today, or lower? If they are higher, will they be higher by more than 4.52%? If they are higher, would they be so much higher that taking the risk of stocks falling is worth it? If you need money to pay, say, a tuition bill for your kids, or you are planning a wedding, or perhaps, you are going to buy a home in a year, it sure would be nice to know that the US Treasury will be sending you a check as you digest your Thanksgiving turkey next year. What if you expect stocks to have a rocky year? I am sure that you have heard that a growing number of economists are expecting a recession in the next 12 months. Actually, a group of Wall Street’s top economists are predicting a 65% chance of recession in the next 12 months, as compiled by Bloomberg. Let’s just say something in your gut tells you that the next 12 months are going to be rocky for the stock market. We will get to those numbers in a moment. Those proverbial “2 birds in the bush” are looking rather flighty, making that “1 bird in the hand” look rather attractive. Not that 4.52% is unattractive. But wait, stocks pay dividends as well, right?
Dividends are not guaranteed, and they are only paid when companies have enough cash to pay them, usually the result of solid earnings. To be clear, companies try really hard not to cut dividends… it’s not good for business, so to speak. But companies do cut them, and some of those companies are mainstays in many portfolios, held for well… their dividends. In The Great Recession, Ford Motor cut its dividend to $0 from $0.10 / share, and it did it once again in 2020. Late last year, the company dropped its dividend from $0.15 to $0.10 / share (it did bump it back up last quarter). That all makes sense because people buy less cars during tough economic times and a recession with the moniker “Great” and a global pandemic can certainly be classified as tough. By the way JPMorgan also cut its dividend in the 2008 recession to $0.05 from $0.38 / share. Ok, it isn’t fair for me to pick out companies which I know have cut their dividends. Let’s zoom out to the Index level. The S&P500 is THE proxy of stocks, the world over. If you had to own 500 stocks, those would be the ones. If you did own all those stocks, you would collect dividends, for sure. Do you know what your dividend yield would be? It would be 1.7%, which is not too bad… in most cases. In fact, compared to Treasuries which yielded less than 1% from 2009 to 2017, that 1.7% with the potential for upside was a great deal. That is why so many investors turned their backs on bonds in the years after The Great Recession.
Ok, ok, I know that stocks have upside potential, and that 1-Year Treasury is limited to only 4.52% if you hold it to maturity. If we look at the S&P500, it returned around +11.8% per year on average, and if we look at the last 10 years, that number is +14.8%. Now THAT is much better than the 4.52% you would lock in with a 1-year Bill. So, if you have the luxury of long-term focus, something I often preach about, then you should take a bit of solace in those numbers. If you have shorter-term plans and you are unsure of where stocks will be in a year from now, the bird in the hand is a rather attractive alternative.
WHAT’S SHAKIN’
CarMax Inc (KMX) shares tumbled by -12.23% in the premarket after the company announced that it missed EPS and Revenues by -62.89% and -9.11% respectively. Those are not typos. The company blamed “vehicle affordability” for the shortfall. Used autos have jumped significantly in the past few years and have played a big role in the current overall inflationary environment. If you throw in higher auto loan rates, well, I will leave that up to you. Potential average analyst upside potential: +30.3%.
Micron Technology Inc (MU) shares are lower by -3.22% in the premarket after it posted an earnings miss after last night's closing bell. The company also lowered its quarterly outlook based on weaker demand for its memory chips. Dividend yield: 0.45%. Potential average analyst upside potential: +25.7%.
YESTERDAY’S MARKETS
Stocks rallied yesterday after the prospects for a soft landing increased with a solid print on Consumer Confidence. The S&P500 gained +1.49%, the Dow Jones Industrial Average climbed by +1.60%, the Nasdaq Composite Index jumped by +1.54%, and the Russell 2000 Index advanced by +1.65%. Bonds rose and 10-year Treasury Note yields slipped by -2 basis points to 3.66%. Cryptos fell by -0.82% and Bitcoin declined by -0.52%.
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