Market Correction 2022 – Week in Review

Market Correction 2022 – Week in Review

Market Correction 2022

The stock markets declined sufficiently to reach correction territory in early-2022 erasing gains after strong returns in 2021. A stock market correction is when the stock market declines between (-10%) and (-20%). This past Friday’s good performance recovered some losses, but certain indices are still in a market correction. For instance, the Russell 2000 is down (-12.2%) and the NASDAQ is down (-12.0%) year-to-date (YTD). The S&P 500 Index is doing better and is down only (-7.0%). However, the Index’s strength is due to the relatively excellent performance of Apple (APPL), which is down only about (-4.1%).

On the other hand, the best performing indices are the CBOE VIX at +40.4%, Crude Oil at +15.4%, and the FTSE 100 up 1.3%. The rise in oil also means the Energy sector is performing well at +17.0%. A check on StockRover* shows the top-performing percentage gainers in the S&P 500 are all in the Energy sector except Activision Blizzard (ATVI), which is the subject of an acquisition by Microsoft (MSFT).

Volatility is Rising

A few short weeks ago, volatility was still in the normal range. Today, volatility is elevated. The CBOE VIX went over 31 last week, the highest since January 2021. The VIX is currently at 27.66. The VIX measures the market’s expectations for the relative strength of near-term price changes. In effect, the VIX measures how much the stock market will go up or down.

For perspective, the normal range is between 19 and 20. Despite the elevated VIX and current selling, the VIX was much higher during the early stages of the COVID-19 pandemic and the sub-prime mortgage crisis. During these periods, the VIX spiked over 60 and 80, respectively.

Stocks are moving up and down several percentage points in a day. For instance, on Monday, January 24^th, the major indices moved several percentage points in intraday trading. The Dow 30 finished up after being down as much as 1,115 points. On the other hand, the NASDAQ was down almost (-5%) and turned positive.

The chart below from StockRover* shows the wide range in values for the three major composite Indices in the past week. Furthermore, all the major composite Indices are down significantly from their peak.

Market Corrections Are More Common Than You Think

Market corrections occur more often than investors probably realize. A market correction is defined as a decline from peak-to-trough of (-10%) to (-19.99%). A bear market is a drop of (-20%) or more.

According to Charles Schwab, there have been 24 market corrections since November 1974, a little less than once every two years. Bear markets are much less common. Only five market corrections have turned into bear markets.

A slightly different analysis by Charles Schwab shows a decline of more than 10% occurred in 11 out of 20 years, or on average once every two years. Yet another analysis claims the average market corrections were (-13.7%) and lasted four months since World War II. Finally, a fourth analysis shows the S&P 500 Index had a market correction in 29 of the past 50 years, about once every 19 months. 

The stock market can be a wild ride. However, long-term investors know bull market gains tend to be larger than down market losses over time. It is just hard to be contrarian when the market is trending down and volatile.

Strength in Dividend Growth Stocks

Dividend growth stocks have an advantage in down markets. Earlier research has shown higher returns with lower volatility over more extended periods. How have the different categories of dividend growth stock performed relative to the three major Indices? The Dividend Kings, Dividend Champions, Dividend Aristocrats, Dividend Contenders, and Dividend Challengers performed better than the S&P 500 Index or the NASDAQ. They were also marginally better than the Dow 30. Again, we use StockRover*.

Final Thoughts on Market Correction 2022

The stock market can be challenging, and this market correction in early-2022 has tested some small investors’ resolve. Some tech and meme stocks are down more than (-50%), and some even down more than (-75%) from their peaks. However, dividend growth stocks have held up relatively well and performed better than the composite Indices. Furthermore, the yield curve is still positive, unemployment is below 4%, and GDP is growing rapidly suggesting the economy is doing well. Granted, inflation is the highest in decades, but some prices are moderating. However, some stocks are trading below long-term price-to-earnings (P/E) ratio averages, which are opportunities.

The Stock of the Week

Today I highlight T. Rowe Price (TROW), which I own. The firm is one of the US’s largest publicly traded asset managers. The company has about $1.69 trillion assets under management (AUM). TROW has an advantage. The company has about two-thirds of assets in stick retirement plans. In addition, TROW’s funds perform better than Morningstar median, peer median, and benchmarks over 10-years. This point has allowed the firm to grow organically and, in turn, become a Dividend Aristocrat. The stock is in the bear market territory, and the dividend yield is up to 2.88%. The firm has no debt and over $3 billion in cash on the balance sheet. The stock price is bear market territory. TROW is trading below the 50-day and 200-day EMA and at the lower end of valuation metrics in the past year. The screenshot below is from Stock Rover*.

Dividend Increases and Reinstatements

I have created a searchable list of dividend increases and reinstatements. I update this list weekly. In addition, you can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

I updated my dividend cuts and suspensions list at the end of December 2021. As a result, the number of companies on the list has risen to 543. Thus, well over 10% of companies that pay dividends have cut or suspended them since the start of the COVID-19 pandemic.

In January, there was one new addition, indicating that companies are experiencing solid profits and cash flow.

The new addition was Compass Diversified (CODI).

Market Indices

Dow Jones Industrial Averages (DJIA): 34,726 (+1.34%)

NASDAQ: 13,771 (+0.01%)

S&P 500: 4,432 (-0.77%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 25.3X, and the Schiller P/E Ratio is about 36.6X. These two metrics were up in the past week. Note that the long-term means of these two ratios are 16.0X and 16.9X, respectively. 

The market is still overvalued despite the recent market correction in early-2022. Earnings multiples more than 30X are overvalued based on historical data.

S&P 500 PE Ratio History

Shiller PE Ratio History

Stock Market Volatility – CBOE VIX

This past week, the CBOE VIX measuring volatility was down ~1.2 points to 27.66. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 index options. It is commonly referred to as the fear index.

Yield Curve

The two yield curves shown here are the 10-year US Treasury Bond minus the 3-month US Treasury Bill from the NY York Fed and the 10-year US Treasury Bond minus the 2-year US Treasury Bond from the St. Louis Fed.

Inversion of the yield curve has been increasingly viewed as a leading indicator of recessions about two to six quarters ahead, according to the NY Fed. The higher the spread between the two interest rates, the higher the probability of a recession.

Economic News

The Conference Board’s Consumer Confidence Index dropped this month to 113.8, following a 115.8 value for December. “Consumer confidence moderated in January, following gains in the final three months of 2021,” said Lynn Franco, senior director at the Conference Board. However, based on consumers’ sentiment of current business conditions and the labor market, the Present Situation Index increased to 148.2 from 144.8 in December. In addition, the proportion of consumers planning to purchase homes, automobiles, and major appliances increased.

The Commerce Department’s first estimate on fourth-quarter gross domestic product (GDP) growth reported the economy expanded at an annual rate of 6.9%. The first estimate is well above the unrevised 2.3% growth in the third quarter. A jump in private inventories contributed 4.9 percentage points to the headline 6.9%, as companies (led by motor vehicle dealers) worked to replenish supplies depleted by the pandemic. A jump in consumer spending during the holiday season also helped contribute to the headline number. As a result, the GDP expanded by 5.7% in 2021, the most robust growth since 7.2% in 1984, followed by a 3.4% reduction in 2020. Inflation showed as the GDP price index climbed by 6.9% — the most since 1981, ahead of the Q3’s 5.6% gain. In addition, core personal consumption expenditures (PCE) increased 4.9%, compared to the third quarter’s 4.6% reading.

The US Census Bureau reported that new orders for durable goods fell 0.9% to a seasonally adjusted $267.6B in December. The decrease follows two consecutive monthly increases and is the most significant month-over-month drop since April 2020. Affecting the headline number was a drop in commercial aircraft (-14.4%) and communications equipment (-5.9%). On the other hand, orders for motor vehicles reported an increase of 1.4% and are up 0.4% YoY. 

Thanks for reading Market Correction 2022 – Week in Review!

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Published at Sun, 30 Jan 2022 04:33:41 -0800