In May, the S&P 500 fell at most by 7.7% before a shocking rally in the last week of the month brought the index flat. Year-to-date the S&P’s loss is just under 14%. The market’s strong volatility this year demonstrates fiscal battle that is currently happening between our strong economic conditions and the ever growing and looming threat of supply chain issues, increasing rates, and stubborn inflation. The uncertainty lies in which of the two forces is poised to take control. Currently, things are going fine. The economy and the policy makers are taking precautions to try and keep it that way. However, there is a storm down the road and, as JPMorgan CEO Jaime Dimon put it, “we just don’t know if it’s a minor one or Superstorm Sandy”.
Jaime Dimon also estimated that American consumers sitting on $2 trillion in pandemic-era savings that can help power the economy even as inflation chips away at it, but only for a time. Consumer sentiment dropped to its lowest level since 2008 this month. Fuel prices are high, the cost of food has risen, borrowing costs are increasing, and other price pressures threaten consumer spending which make up about 70% of the US’s economic growth.
We are well past the phase of inflation being “transitory”. It’s here, and it’s a frightening issue. The concern now is if the Fed will manage create a soft landing where inflation staggers and growth slows mildly, or will inflation push us into a new recession. Unfortunately, there’s no way of knowing. This stubborn inflation has a myriad of outcomes that are impossible to predict and I recommend that you don’t try to. Exerting energy on worrying about things out of our control is a waste. Being a stock investor requires us to be comfortable with whatever short-term and unpredictable volatility the market throws at us. Risk vs reward teaches us that this (hopefully) short-term risk is the price the stock market demands from us in order to gain from the higher long-term returns compared to bonds, annuities, CDs, etc.. You have to maintain emotional stability with your investments in order to realize those higher long-term gains.
Through this volatility I have continued to add to positions regularly and keep my head level. Owning time-tested and successful companies that have emerged strong through similar historical struggles and a reasonable portfolio allocation are things that keep me stable and confident in my investments. It also helps to remember that no one, emphasis on NO ONE, can consistently time the market. If you have any faith in the efficient market hypothesis, then you know that every nano-second of every trading day there are an inconceivable number of trades, statistics, news headlines, and decisions being made that make the market far too complex to successfully time reliably. Just as investors find it difficult to time the market, economists have little success with forecasting recessions. History has shown that economists and analysts of both the private and official sector miss forecasting the magnitude of the recession by a wide margin until the year of the recession is nearly over.
It is clear that nobody is smart enough to time the market or forecast a recession. That is why it is important as a dividend income investor to tune out the noise in this environment, hunker down, and stick to the long term plan that is in place. Place your faith in strong and successful companies, watch their reporting, news, price action, and financial data in order stay in tune with the health of their dividends, and if it seems to be shaking take action, otherwise continue as planned. It really is quite simple. Despite the market’s uncertainties, the investing space for dividends have remained strong. The market experienced a number of dividend increases with 31% from Lowe’s (LOW), 7.6% from Deere (DE), 10% from Northrop Grumman (NOC), and a handful of other notable raises from several banks. Quality dividend stocks are a safe haven in volatile times. Use that knowledge and other things discussed in this monthly recap to stick to the plan and build yourself financial freedom through dividend income.
Thank you for your support, see you next month for another recap and more frequently with portfolio updates and other articles.