Weekly Market Trends

Navigating Inflation-Driven Downturns with Dividends

As inflation appears to soften, a sharp decline in leading economic indicators flashes warning signs of a recession. High-dividend stocks may be a powerful tool to help navigate an inflation-driven downturn. 

Senior Research Strategist

Chinese equities drove the continued rally in emerging markets. Meanwhile, the US Financials sector declined on the back of lower yields. Oil prices rebounded from their recent lows, ending the week slightly below $80 per barrel.

market table of index performance as of December 2, 2022

Price Cap on Russian Oil

The G7 countries, Australia, and European Union countries agreed to put a $60-per-barrel cap on Russian oil prices by prohibiting shipping, insurance, and re-insurance companies from handling cargos of Russian crude, unless sold for less than the price cap. Meanwhile, the OPEC+ group agreed to keep their production target while assessing the impacts of the price cap on Russian oil.

Retail Slump in Europe

On the back of record high inflation, retail sales in Europe are likely to show a decrease in consumer spending.

Rate Hikes to Slow

In his recent speech at the Brookings Institute, Federal Reserve Chairman Powell confirmed that smaller rate increases are likely at the upcoming Federal Open Market Committee (FOMC) meeting.

US Data Prints Show Strong Labor Market As Inflation Softens

  • October Core PCE inflation slowed from its September pace, increasing by 0.2% for the month and up 5% from a year ago, slightly below consensus estimates.1
  • The ISM Manufacturing Index fell into contraction territory for the first time since May 2020, as demand continues to soften and input prices decrease. The ISM Services Index is expected to show that services activities continued expanding, but at a slower pace in November.
  • The Producer Price Index (PPI) for finished goods is likely to show further easing of input prices as global supply chains normalize.
  • November nonfarm payrolls showed continued strength in the labor market, with notable job growth and higher wage growth than we saw in October.

Navigating Inflation-driven Downturns With Dividends

October CPI and PCE inflation were softer than expected and showed slower price increases than in September. But their absolute levels remain near 40-year highs and the recent trend has not been consistently downward.2 Meanwhile, negative near-term forward spreads — the Fed’s preferred indicator for recession risk — and a sharp decline in leading economic indicators are flashing warning signs of an imminent recession.3

High-dividend stocks have historically outperformed both the broad market and low-dividend payers in a high inflation environment — and reduced drawdowns during bear markets — as shown in the chart below. This can provide investors with a powerful tool to navigate an inflation-driven market downturn.

Implementation Idea: SPDR® Portfolio S&P 500® High Dividend ETF (SPYD) 

This year, high-dividend-yield stocks have shown similar resilience. The SPDR® Portfolio S&P 500® High Dividend ETF (SPYD) seeks to provide exposures to high-yielding US large cap equities by equally weighting the highest yielding 80 stocks in the S&P 500. SPYD has outperformed the broad market by 19% year to date. 

Even with SPYD’s recent outperformance, it is still trading at a 35% discount relative to the broad market, and 20% lower than its historical median based on forward price to earnings (P/E).4 While dividend ETFs have taken in $65 billion year to date,5 investors are still significantly underweight dividend stocks by historical measures.6

Dividend stocks’ resilience in the inflationary environment, attractive valuations, and potential mean reversion in investors’ allocations may further support their performance in 2023.

High-dividend Stocks’ Outperformance in a High-inflation Environment and During Bear Markets

High-dividend Stocks’ Outperformance in a High-inflation Environment and During Bear Markets

SPYD Standard Performance as of September 30, 2022

SPYD Standard Performance as of September 30, 2022

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