Bull|Bear Insights

When I wrote the book “All About Dividend Investing” for McGraw-Hill, I focused on two widely known benefits of dividend-paying stocks: they have outperformed over long periods of time, and high-yielding dividend-paying stocks tend to have the best performance, especially when market trends turn negative. In this article we’ll further explore the facts and figures that support these notions. 

You may have noticed that the market cycle has changed along with the Fed’s monetary policy shift to fight inflation. With inflation soaring, it is clear that the Fed is way behind the curve on raising interest rates. They will likely stomp on the proverbial breaks in an attempt to rapidly slow the overheated economy and inflation. When the Fed moves into this type of posture, they have caused a recession about three-quarters of the time. And recessions are typically correlated with bear markets.

Last week ended with the realization that inflation hadn’t peaked. This week began with markets pricing in a 75 bp rate hike based on a whisper from someone who was in the know. The Fed’s hike puts the U.S. on the steepest tightening path in the G-10, up 1.50% so far this year. To slow inflation and rising prices, the Fed needs to reduce consumption demand. As demand cools, companies take note and start to reduce spending, and then as a second step, curtail employment. This causes the economy to shift into recession which can quickly reduce corporate profits. 

With dire warnings from blue chip financial leaders indicating we are heading for an economic and market hurricane, it’s time to sit up and take notice. With record inflation numbers driven by wage-price pressures not seen since the 1970s, we need to analyze that inflation cycle and what happened to markets. Buckle up folks because it is not pretty!