Terrible News But No Reaction

We have just had the worst earnings warning season since the recession, economic numbers around the world are coming in soft and peripheral spreads in Europe are close to record wides. In summary the news has been terrible. Yet the market is hanging in. There is a saying that "the reaction to the news is more important than the news itself". This is enough to stop me from being bearish but I cannot be bullish either with the deteriorating economic situation and the mixed sentiment.

It seems that dividend paying stocks are the new bonds. Many income investors are being forced into dividend paying stocks unable to find yield anywhere else. This adds a dynamic to the market that is difficult to quantify. Yield chasing does not typically end well but its possible that we are still in the early innings.


Brent Barber said...

It's likely that the market essentially being flat (with a bunch of interim volatility) for the last year and a half has priced this in.  Hard to find anyone who thinks things are getting better, so valuations are such that they reflect a flat to slightly down economy.

At some point, either the economy deteriorates further and stocks fall as earnings fall or it starts to gets better and we get some P/E expansion as well as improved earnings.  What I don't think we see is a lot of P/E compression if the economy gets worse.

Tsachy Mishal said...

It seems that it will take a pretty bad scenario in order to take the market down significantly. Not impossible given the massive imbalances and slowing economy but a tough bet to make.

Shubh Desai said...

My Portfolio of REIT, mREIT, MLP is up like 40%, but other security from Europe and commodities are down 15%. So yes high yield is doing much much better than broad market.

Tsachy Mishal said...

The valuation difference between stocks that pay dividends and those that don't is incredibly large. A stock like GOOG thats growing at 20% a year trades at a 9% FCF yield based on next years earnings while a REIT trades at a 3.5% yield before taxes.

Shubh Desai said...

Couldn’t agree with you more, but mix of REIT, mREIT and MLP
are paying me 9% a year dividend since 2010 and its up like 70% in two years.

Aristocrats dividend payers are paying me 4% a year and is up
like 50% in last three years.

While some of the oil and gas companies are at 2009 level. I pick  them up last month, also European securities
are close to 2009 level that I am accumulating since last six months, but that
portfolio of stocks are down 14% which also pay dividend.