Some Stocks Hit a Brick Wall, Others Make Progress

Have you ever “hit” a proverbial brick wall (or maybe even a real one…ouch!)? Have you faced something that got in the way of progress? There are times when it feels like we just can’t move forward, for one reason or another. As you can imagine, this sometimes happens with the stock market, too, and there are many pundits that believe that the US economy is about to hit a wall.

In times like these, having a plan, a process, and the discipline to follow through are important. Through an intensive research process, we work diligently to find companies that can prosper, even in a difficult economic environment. Last week, most stocks continued the path upward with the S&P 500 up 1.2% and the Dow advancing 2.2%. However, the Nasdaq upward “run” came to an abrupt stop, as it lost 1%! We think that pause will be less of a wall and more of a bump in the road.

Last week was the opposite of the trend since the March 23 market bottom. Dividend stocks have been stuck, making far less progress than most parts of the market during the current recovery. The Dow, which is predominately comprised of these dividend-type stocks, is up 43% since the market bottom, whereas technology stocks are up over 52% on average.

It is surprising that the Dow stocks have not made more progress considering the Dow has a current dividend yield of 2.32%, whereas the 10-year Treasury is yielding just 0.62%, which is about 75% less than the Dow. Yet it does make some sense.

One reason that Dow stocks have had difficulty making more progress is that many of the companies in the Dow have a more uncertain economic outlook. With many parts of the economy still shut down or running at limited capacity, many of these companies have hit a brick wall with earnings and still have a cloudy future ahead.

FactSet Research is forecasting second-quarter earnings 2020 to be 44.6% lower than the same period in 2019. That expectation is a significant drop, making most analysts question whether many of these dividend companies will have enough sales and positive cash flow to support their dividend payments in the future.

This is a valid concern because many dividend stocks have already reduced or suspended their dividends. During the second quarter of 2020, 10% of the S&P 500 companies have already cut or suspended dividends. This, in our estimation, could be a real wall for these companies.

Now, the good news is not all companies have hit such a wall. In fact, some companies are still increasing their dividends, even in this tough economic environment. A total of 244 companies increased their dividends during the second quarter. That type of positive progress is impressive, showing that not all stocks are created equal!

Philippians 3:14 states, “I press on toward the goal to win the prize for which God has called me heavenward in Christ Jesus.” As God’s stewards, we are called to multiply all that He has entrusted to us. As our investment team continues to monitor the market environment, we are consistently watching each company in our portfolio. We are not afraid to cut ties with any stocks that become too volatile, eliminate those with weak earnings forecasts, or part ways with companies that are likely to cut or suspend their dividend payments. We pray that our team’s hard work can help you avoid hitting those brick walls and instead “win the prize” on your journey toward financial freedom.

Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights

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