Private Client Group

May 31st, 2022

Fed Hawkish on Rates, Dividend Stocks Favored, China-Taiwan Risk

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In today’s Steady Investor, we cover current events that we believe are shifting the current state of the volatile market, such as:

What Last Week’s Fed Minutes Tell Us – This week, market-watchers were eagerly anticipating the release of minutes from the Fed’s May 3-4 meeting. Analyzing minutes is important for understanding the potential path of rate increases and as a means for understanding just how hawkish the Fed is. The verdict is that the Fed is prepared to take rates as high as needed to stem inflation pressures, which could mean additional 50 basis point increases at future meetings and also potentially raising rates high enough to intentionally slow the economy. The Fed has not raised rates by a half percentage point since 2000. This strategy is reminiscent of Fed Chairman Paul Volcker’s monetary policy strategy in the 1980s when he deliberately caused a recession in an effort to tamp down the ‘great inflation’ of the late 1970s. Back in the 1980s, however, Chairman Volcker moved the fed funds rate past 20%, whereas today the fed funds rate sits at a range between 0.75% and 1%. In reality, comparing the two approaches is like comparing night and day. The Federal Reserve also made note in their May 3-4 meeting of their intent to begin shrinking their $9 trillion portfolio on June 1, which will remove a significant source of demand from the bond and mortgage securities markets. Upward pressure on mortgage rates and longer duration interest rates is to be expected, which could be a positive if it ultimately results in a steeper yield curve.1

Guard Your Investments Against the Market Correction!

As inflation worries grow, and the market enters correction territory, many investors may be unsure of how to protect their investments. This can cause investors to make knee-jerk decisions that run counter to long-term goals.

To help you navigate this turbulent time, we have put together a free guide to help you avoid the worst impacts of a sudden market drop.

If you have $500,000 or more to invest, download our guide, 4 Keys to Navigating a Stock Market Correction2, which offers the most important steps you can take to help ensure that a temporary market downturn won’t cause irreversible long-term damage to your portfolio.

Why Dividend-Paying Stocks are Being Favored – S&P 500 companies paid out a record $137.6 billion in dividends in Q1, and investors are taking notice – particularly as volatility continues. For years, investors have been flocking to the high growth, high valuation technology trade, which gained even more steam during the pandemic as the economy made a significant shift to digital everything. But as interest rates have moved higher and the growth outlook moderates, many of these high valuation names have experienced sharp selloffs as investors favor cash overgrowth. What’s more, investors appear to be going a step further and favoring companies that are choosing to use cash reserves to pay out higher dividends versus opting to buy back shares. This shift demonstrates that investors again are favoring cash payouts now versus the prospect of profits later. The proof is in the pudding – the S&P 500 High Dividend index is up +3.6% in 2022 while the S&P 500 Buyback index is off -13%.3

Who Won the U.S. – China Trade War? It’s been nearly three years since the U.S. ratcheted up tariffs on Chinese imports, an action that escalated into a trade dispute and eventually a resolution that was supposed to see China buying more U.S. goods. It didn’t happen. China fell 40% short of its commitment in Phase One of the trade deal to buy an additional $200 billion over two years, and reports of technology theft and unfair practices continue. For its part, China has not necessarily benefited from the trade dispute and resolution, either. Economists note that Chinese companies that were hit with tariffs have spent less on research, reduced hiring, and exported less to America.4

A Note on the China-U.S.-Taiwan Risk – President Biden’s trip to Southeast Asia this week in some ways reminded the world of another potential geopolitical conflict in the offing: a Chinese invasion of Taiwan. U.S. policy on Taiwan has been one of “strategic ambiguity” since Nixon’s days, which has largely positioned the U.S. as an ally and arms supplier to Taiwan without defining what military action, if any, the U.S. would take to support it. In many ways, the Russian invasion of Ukraine is serving as a case study for how Western countries might respond to an unprovoked invasion of democracy like Taiwan, and President Biden’s comments that the U.S. would consider defending Taiwan have perhaps served to have China grasp the full economic – and perhaps military – repercussions of an invasion. For markets, regional conflicts like the Russia-Ukraine war have not historically had a severe impact on the global economy or equity markets. But a conflict that involves the U.S. and China would, in our view. It’s a risk to keep an eye on.5

How to Navigate a Market Correction – Volatility has shifted the market in many ways this year, and for those who are unsure of how to navigate a market correction, we want you to be prepared.

With that being said, now is the perfect time to base your investing decisions on research and fundamentals. To help you do this, we have created a guide, 4 Keys to Navigating a Stock Market Correction6. This guide answers question like – Are there any silver linings that come with it? What are some ways to navigate through it?

If you have $500,000 or more to invest and want to learn more, click on the link below to download our latest guide: 4 Keys to Navigating a Stock Market Correction6.

Disclosure

1 Wall Street Journal. May 25, 2022. https://www.wsj.com/articles/fed-minutes-show-growing-urgency-for-tighter-monetary-policy-11653501768

2 ZIM may amend or rescind the free guide “4 Keys to Navigating a Stock Market Correction” for any reason and at ZIM’s discretion.

3 Wall Street Journal. May 24, 2022. https://www.wsj.com/articles/there-is-a-rush-for-cash-on-wall-street-11653364425

4 Wall Street Journal. May 20, 2022. https://www.wsj.com/articles/who-won-the-u-s-china-trade-war-11653059611

5 Wall Street Journal. May 24, 2022. https://www.wsj.com/articles/china-taiwan-relations-tensions-explained-11653322751

6 ZIM may amend or rescind the free guide “4 Keys to Navigating a Stock Market Correction” for any reason and at ZIM’s discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The S&P 500 High Dividend Index serves as a benchmark for income seeking equity investors. The index is designed to measure the performance of 80 high yield companies within the S&P 500 and is equally weighted to best represent the performance of this group, regardless of constituent size. An investor cannot invest directly in this Index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The S&P 500 Buyback Index is designed to measure the performance of the top 100 stocks with the highest buyback ratios in the S&P 500. An investor cannot invest directly in this Index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
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