Review & Preview: Would Variable Dividends Work?

By Nicholas Jasinski |  Tuesday, April 21

De-risking. In recent days, investors seem to have been reminded of the dire straits the economy and companies are facing as a pandemic-induced recession takes hold, even with more fiscal stimulus on the horizon. The first wave of quarterly earnings reports and an unprecedented collapse in the price of oil have pumped the brakes on an optimism-fueled rally that had boosted stocks over 25% from their late-March lows.

Major indexes added to their losses from yesterday: the S&P 500 fell 3.1% today, the Dow Jones Industrial Average lost 2.7%, and the Nasdaq Composite dropped 3.5%.

Not only is the process of reopening the U.S. economy bit by bit going to take a significant amount of time, the signs from other countries that have already begun that process aren't all promising. In Singapore, for instance, a second wave of infections has arrived after the city-state had appeared to all but eliminated the coronavirus. China, meanwhile, has ordered movie theaters to close again after initially permitting them to reopen.

The fact that it won't be a full-speed-ahead reopening of the U.S. economy all at once appears to be sinking in. But what exactly the path back to normal activity looks like is still almost entirely unclear—there's just no precedent for this.

Very few of the dozens of companies that have reported their quarterly results over the past week have been eager to forecast the future either. Managements have been withdrawing previously issued guidance or declining to put concrete numbers on their current expectations, citing the wide range of possible outcomes.

An investor would prefer bad news over no news, goes one Wall Street adage. Uncertainty makes investors less eager to take risks because when there's little to anchor expectations to, the worst-case scenario remains on the table. An extreme example came in late February and most of March, when investors had to quickly wrap their minds around the coronavirus' unknowable impact on the world—and stocks tumbled 35% in a matter of weeks. As the picture became clearer, stocks bounced off their lows.

The negative impact of heightened uncertainty is especially true coming off the major rally that followed that crash. The S&P 500 is still down 20% from its February peak, but so are earnings estimates. In fact, by several measures the index is trading at practically the same valuation today as it was at its record high. That's a high bar to justify when the outlook is demonstrably worse.

Investors rushed to de-risk their portfolios today. So despite the fact that futures on West Texas Intermediate crude oil for June delivery plunged 43.4%, to $11.57 a barrel today—after May futures went sharply negative yesterday—the S&P 500 energy sector was one of the best-performing groups on the market. It's the most beaten up sector this year, and hasn't participated much in the recent weeks' rally. Essentially, rather than no news, the bad news is already priced in.

Virus-proof technology and software sector stocks that have led the market were the biggest losers today, down over 4%. Health-care stocks also saw declines greater than the market. If the market's next leg is down again, those sectors could have the most to lose.

Oil and gas driller Helmerich & Payne was the best-performing stock in the S&P 500 today, up 5%, while cybersecurity firm Fortinet was the greatest laggard, down 10%. Until today, that pair had underperformed the index by 48 percentage points and outperformed it by 17 points, respectively, since the start of 2020.

Ben Levisohn has more about why investors were selling their winners today over at barrons.com.