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Stocks are riskier today than they were only weeks earlier.
At least that’s the perception that’s been forwarded by conventional opinion.
You could breezily and persuasively argue that stocks are indeed riskier today than they were only a fortnight-and-a-half ago. The numbers are difficult to refute: The Dow industrials, the S&P 500, and the NASDAQ Composite are all down 11% month-to-date.
Stock prices are falling on rising interest rates and rising trade hostilities between United States and Chinese bureaucrats. A flattening yield (a consequence of the Fed’s interest-rate policies) and slow-growth prospects (a consequence of the U.S.-China trade hostilities) portend a poor outlook for stocks.
Risk perception among individual investors has certainly ratcheted higher. The American Association of Individual Investors’ (AAII) latest sentiment survey shows bearish sentiment at a five-year high. Forty-seven percent of investors surveyed are bearish. The historical average is 30%.
The stock market is perceived as riskier today than yesterday. I perceive it otherwise. I perceive stocks as more value-priced today than yesterday.
The forward price-to-earnings multiple was 17.1 on the S&P 500 when we entered 2018. As we exit 2018, the multiple has dropped 15.1. The five-year average is 16.4. The 10-year average is 14.6. (The 10-year average includes the recession years 2008 and 2009.)
The market is hardly imbued with irrational exuberance, which frequently precedes a major market correction.
I like investor sentiment today. Though it might read as if I’m channeling George Orwell, negative sentiment should be perceived positively by investors with capital to allocate.
The AAII’s data on its investor survey shows that when bearish sentiment is exceedingly low, as it is today, the S&P 500 has historically produced higher-than-median six- and 12-month returns.
Of course, a degree of investing risk is always prevalent. We must concede that the “E” (earnings) in the forward P/E multiple for the S&P 500 could fall. In that case, the multiple would expand, thus eroding the value proposition.
We can assuage some of our uneasiness by focusing on dividends.
As the dividend goes, so eventually goes the share price. Earnings will wax and wane quarter to quarter. Companies that have proven that they can maintain and grow their dividends through the short-term volatility will reward investors with a higher future share price
They reward investors with higher income now. The dividend yields offered by many blue-chip dividend growers are at highs unseen in years. I offer a small sampling.
Altria Group (NYSE: MO) shares yield 6.5%. Altria has increased its dividend annually for the past five decades. The latest increased occurred in September when the dividend was increased 14%. Investors who have bought Altria shares when the dividend yield has exceeded 5% have fared well.
Exxon Mobil (NYSE: XOM) has a 40-year history of dividend increases. It has a 100-year history of paying a dividend. Investors can buy Exxon Mobil with a 4.8% dividend yield today. The dividend yield is at a multi-year high. Investors with a long investment horizon have had little to gripe about when they’ve bought Exxon Mobil shares with such a high yield.
Asset Manager Franklin Resources (NYSE: BEN) has increased its dividend annually any since its IPO 36 years ago. The dividend was increased 11% with the next payment on Jan. 11. Franklin Resources shares are priced to yield 3.6%. This is the highest yield on offer over the past decade. History has shown a 3.6% dividend yield to be a remunerative yield.
Stocks are perceived as a riskier asset class today. To be sure, some stocks are riskier, but that’s always the case (which is why I never like every stock).
Investing risk isn’t embedded in an asset class. Risk is relative. The price you pay determines your risk. Pay a higher relative price (to historical averages and other asset classes), assume a higher investing risk. Pay a lower relative price, assume a lower risk.
Stock prices could continue to trend lower. No one knows the future. We all know the past. The price of many stocks today relative to the recent past points to a less risky market.