October 27, 2022
Say all you will about growth stocks, dividend stocks, value stocks – the market doesn’t care… it has been going down.
This week, two of the foremost figures in America’s dividend and value stock shortlist took a massive haircut. Walmart fell more than -20% during the week after disappointing earnings. A day later, Target did the same – it fell more than -29% on the week.
The companies’ earnings showed signs of slowing same-store sales growth. Other retail players reported disappointing sales growth too, citing inflation and changing consumer spending habits.
This is hardly a surprise – with wage growth tracking below inflation, which has come to a 40-year high in recent months, people might be making different decisions about where to spend their money.
Have you heard of Defensive Stocks? Here’s a complete definition.
Are investors scared of value stocks sinking?
However, given the impact on these two retail staples, the investor public is sort of scared at the moment. And while the inclination among unseasoned investors, at least right now, might be to sell their holdings and walk away until the grass is greener, we have already been living in a bearish period for growth stocks for over a year already. It only makes sense that value stocks are following suit now.
Just take the Russell 2000, America’s choice growth stock index, as evidence of that: it’s down -44.4% over the past year. In fact, it was down -11% before the other major indexes, namely the Nasdaq-100 and the S&P 500, even started showing explicit downward momentum in January 2022.
And given all the talk about recession, gloomier days for stocks ahead, and higher interest rates, Target and Walmart’s fall might epitomize a certain change of heart among investors as it pertains to value stocks and dividend stocks.
But there’s a saying in the markets: money isn’t made in bullish markets, it’s made in bearish ones.
What the P/E Ration has to say about the current market downturn
Based on fundamentals, the anxiety around the market might just be an overreaction. One indicator that investors can look at is the market’s P/E Ratio, which stands for Price-to-Earnings Ratio. It can be used to help investors measure the value of a stock vs. its quality of its earnings.
Right now, the broader index is trading at a forward P/E ratio of 16.4 – that’s below the five year and 10-year average, according to a report published on May 20 by FactSet. They cite that, of the 95% of the companies which have reported from the S&P 500 so far, the aggregate earnings of those companies “have exceeded estimates by 4.7%.”
That might be lower than the long-term average, but these factors point to healthy fundamentals and earnings within the market.
The reality? Investors are very high-strung and sensitive right now. Maybe they should be: there’s lots of things to worry about – there’s a war in Ukraine, global supply chain headaches, fears about inflation and interest rates, and plenty of other economic hazards that present obstacles to making money.
Negative earnings surprises are sending stocks tumbling by over -5% on average according to FactSet’s report, and even positive earnings are sending stocks down -0.5% on average.
But markets are cyclical, valuations are too – and even though there is lots of FUD (Fear, Uncertainty, and Doubt), it pays to have a plan for all the ups and downs in the market. If you don’t have one already, now might be a good time to take score – and make one.
Nobody knows whether the markets will head lower or higher from here. That’s why it pays to make a plan and stick to it in spite of that uncertainty.