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.
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.
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.
On the back of record high inflation, retail sales in Europe are likely to show a decrease in consumer spending.
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.
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.
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
SPYD Standard Performance as of September 30, 2022
1 FactSet, as of December 2, 2022.
2 FactSet, as of November 30, 2022.
3 Bloomberg Finance, L.P., FactSet, as of November 30, 2022.
4 FactSet, as of November 30, 2022. Historical median is for the period since the fund inception September 2015.
5 Bloomberg Finance, L.P., as of November 30, 2022. Based on SPDR Research calculations.
6 State Street Global Markets, as of September 30, 2022. Based on holdings indicators produced by State Street Global Markets using aggregated and anonymized custody data of $43.7 trillion in assets. Investors’ position in dividend stocks is at bottom 20th percentile over the last 20 years.
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