Don’s Outlook 2/12/10
The uncertainty hampering the markets, the components of which I have outlined in my recent emails to clients, certainly took center stage again this week. There was a renewed focus on Greece and its potential default; speculation continued to swirl over whether a failure to resolve this fiscal crisis would have a contagion effect that could ripple through the rest of Europe, pulling down weaker nations in its wake. This uncertainty has limited investors’ conviction that the global economic recovery is strong enough to sustain lapses in economic indicators or new shocks to the system.
The crisis facing Greece and the eurozone is the type of event that economists always warned policymakers about, believing that a coordination of fiscal and monetary policy would prove too difficult under times of stress. Although the European Union (EU) still lacks a mechanism to deal with events such as this one, it is unlikely that Greece would be allowed to default and risk destabilizing the union at this stage.
Nevertheless, investors do fear the outlying risk of contagion, no matter how remote. More likely, however, the inaction or lack of clarity is fueling these concerns. The latest statements by EU officials lacked concrete details, and there were rumors that Germany was hesitant to move forward. Germany has always feared that its own involvement in a monetary union would lead to demands on its fiscal responsibility, which is why it mandated a “no bailout” clause from the outset. Even today, direct bailouts are unpopular, but in the case of Greece, a combination of fiscal tightening and financial-underwriting by stronger EU nations, or even the International Monetary Fund (IMF), is likely.
Many of the headwinds currently facing the market are actually supportive of core funds such as Federated Strategic Value (SVAAX). Low interest rates, the expected below-trend economic growth, the effects of fiscal stimulus withdrawal, and sovereign debt concerns should have investors focusing on dividends and yield once again.
Dividends did not matter much to investors in the 1990s when stock prices were rising 15% or more, nor did they matter much to corporations that were focused on share-buyback programs, which were used in part to disguise stock-option incentives that otherwise diluted shares outstanding. But after two bear market swoons snuffed out years of price gains, investors once again realize that dividends often provide a stable—and sometimes the only—source of positive real return.
Although dividends per share declined 21% in the U.S. over the course of 2009 due to a strong corporate emphasis on conserving cash, dividend growth is expected to rise 9% this year among S&P 500 companies. However, not all companies will participate. In fact, 30% of companies are expected to cut or maintain their current dividend payments, but 25% are expected to grow their payouts by 25% or more. Instead of searching just for high yield among stocks, which is often associated with high risk (whether it is perceived or not), it is better to focus instead on quality companies that offer solid or rising dividends, such as those found in SVAAX.
