The first quarter of 2022 is in the books, and trading sentiment is downcast. The S&P 500 Index (SPX) was down 5.83% and the Russell 2000 Index (RUT) slid 11.17% over the same time period.
A deeper dive into the numbers reveal more volatile market patterns heading into Q2, and that’s a scenario that won’t comfort jittery investors.
“With just over a quarter in the books in 2022, we are seeing a divergence in performance between large-cap stocks (as measured by the S&P 500) and small-caps (as measured by the Russell 2000),” TheStreet’s Jonathan Heller noted on Real Money last week. “These indexes are once again more than 5% apart in terms of year-to-date performance. The last time that happened was on Feb. 4, when the S&P 500 was down 5.47% and the Russell was off 10.82%.”
According to Heller, that difference of 535 basis points evaporated over the following month, and by March 9, both were down about 10%.
“As of Thursday, April 7, the S&P was down 5.21% while the Russell was off by 10.21%,” he said. “You'd expect large-caps to outperform in this extremely uncertain environment of rising interest rates, inflation, and war, and frankly, I am surprised there is not a larger divergence.”
In terms of volatility, as measured by trading days that an index has closed up or down at least 1% (a "volatile day"), the Russell 2000 is, not surprisingly, the winner. During the 67 trading days so far in 2022, the Russell has experienced 48 volatile days, with 21 up days, and 27 down days.
“That means that on average, the Russell is experiencing 3.5 volatile days a week,” Heller stated. “That includes 15 days where the index moved up or down at least 2%, and four 3% days.”
For its part, the S&P 500 has had 33 volatile days year-to-date, 15 up and 18 down. That includes eight days of plus or minus 2% performance, and none above 3%. Frankly, that's a bit surprising as well, given the current state of affairs.
Altogether, the news could have easily been worse for the stock market in Q1, Heller said.
“This market has held up much better than I would have expected,” he noted. “If you told me that 2022 would be the year of 7% inflation, potentially seven interest-rate hikes that could take the fed funds rate to about 2%, and an invasion of Ukraine, among other circumstances, I would have predicted much different results at this point
“But that's part of what makes markets so interesting, and at some points, so frightening,” he added.
With April churning into high gear, let’s take a look at the “stocks of the week” that matter to TheStreet’s trading experts.
Mosaic Co. $73.86. 5-day performance 12.11%.
Florida-based Mosaic (MOS) is the largest fertilizer producer in the U.S., and its share price continues to grow larger, as well.
TheStreet’s Ed Ponsi said the ongoing sanctions against Russia over the its invasion of Ukraine should be a big boost to MOS.
“On Wednesday, April 6, the U.S. announced a new round of punitive sanctions against Russia,” Ponsi noted. “The U.K. joined in, announcing an end to Russian oil and coal imports by the end this year. In Brussels, European Union delegates negotiated another round of sanctions.”
It was against this backdrop that one of the largest agricultural cooperatives in the U.S., an entity known as CHS Inc., filed a form 10-Q with the Securities and Exchange Commission. Included in that filing was a statement warning about potential difficulty obtaining fertilizer from Russia.
“Last year, Russia accounted for nearly 20% of global fertilizer exports,” Ponsi said. “Due to supply chain disruptions caused by the war, the price of fertilizer is skyrocketing.”
A scarcity of fertilizer threatens food security around the world. For example, Brazil gets nearly a quarter of its fertilizer from Russia.
That’s where Mosaic can benefit.
“Mosaic is the largest U.S. producer of potash and phosphate fertilizer,” Ponsi said. “Mosaic shares grew by 70.75% last year and have already topped that figure by growing 82% year to date. The stock closed at a 10-year high on April 6.
Ponsi cites a “bullish” formation that suggests the stock could soon reach $95 – and he wants in on the stock.
“Here's my plan for trading Mosaic,” he said. “I'm entering with one-half my normal position size, with an eye toward buying more on a pullback. As long as the stock stays above the stock's 50-day moving average, currently at $55, I'll stay with the position.”
There is no end in sight to the conflict in Ukraine, and good or bad, that should help MOS.
“The global food supply is at risk if a persistent shortage of fertilizer materializes,” he said. “While we don't like the circumstances that have led to Mosaic's rally, this stock might have one of the best charts in the market right now.”
Aflac $65.52. 5-day performance 1.05%
JPMorgan Chase & Co. $133.49. 5-day performance (-) 1.35%.
Dividend stocks are in demand in a roiling stock market right now – it’s one of the few “sure things” on the investment horizon.
TheStreet’s Bob Ciura has been canvassing the market landscape for dividend winners, and he’s found a couple at an opportune time.
“Interest rates have been on the collective mind of investors for several months now, as we've seen rates move wildly in both directions. Interest rates can be impacted by a variety of factors, including economic strength, inflation in the cost of goods and services, rate hiking cycles, and general risk appetite of investors,” Ciura said.
In the current environment, the market has a rate-hiking cycle underway while inflationary pressures are mounting due to spiking commodity prices and other inputs, including labor and freight. “That led to a yield-curve inversion, a condition where short-term rates overtake long-term rates, such as the closely watched relationship between the U.S. 2-Year and 10-Year Treasuries,” Ciura noted.
Higher interest rates can have differing effects on different groups of stocks, with the most prominent impact being a lower equity risk premium - the premium investors are willing to pay for stocks, which are riskier than Treasuries.
However, there are certain sectors of the stock market where rising rates create tailwinds for earnings. “Dividend stocks,” in particular, can do well in a rising-rate environment,” he added. Ciura cites several dividend plays, including Aflac and JP Morgan. Here’s a closer look.
Aflac Inc. (AFL) Aflac provides supplemental health and life insurance products, mostly in the U.S. Aflac is a full-line insurance provider for various types of disability, critical illness, dental, vision, and other non-medical types of insurance.
The company was founded in 1955, generates about $20 billion in annual revenue, and has a current market cap of $42 billion.
“Aflac, like other insurers, stands to benefit from higher interest rates because insurers collect a premium from customers and then invest those premiums, which is referred to as float,” Ciura said. “In other words, insurers take a premium that doesn't need to be paid out yet, and invest it to generate interest and dividend income until there are claims to be paid.”
Insurers tend to invest fairly conservatively, and for good reason, so they tend to be sensitive to prevailing market interest rates.
“Aflac, for instance, had $133 billion of investment securities at the end of 2021, with substantially all of that in interest-generating securities,” he added. “For the year, that $133 billion in investments generated almost $4 billion in investment income, so the scale here is sizable to say the least.”
Aflac has raised its dividend for a very impressive 40 consecutive years, making it a Dividend Aristocrat. It offers a 2.5% yield today.
“That's about double the S&P 500, and the payout ratio is just 26% of earnings for this year,” Ciura said. “That means the dividend has a huge amount of runway for future growth, and dividend safety should be rock solid in the years to come.”
JPMorgan Chase. JPMorgan Chase & Co. (JPM), one of the largest banks in the world. The company has an enormous array of banking and lending services, primarily in the U.S., as well as a variety of investment and wealth management offerings.
JPMorgan traces its roots to 1799, and is said to have acquired about 1,200 institutions over its 200+ year history. The bank should see $123 billion in revenue this year, and trades with a market capitalization of $400 billion.
“JPMorgan stands to gain from higher rates because it should see its lending rates move higher over time as rates rise,” Ciura stated. “Banks take in short-term deposits that have little or no interest paid, and then lend them out longer-term at higher rates to generate spread.”
When rates are rising -- and in particular, in the early stages of rising rate cycles -- the spread between the lending and deposit rates increases. That generates additional profits, and that's why Ciura thinks JPMorgan stands to do well during this rate hike cycle.
“Recent weakness in the stock has JPMorgan yielding 3% today, so it's a proper dividend stock at the moment,” he said. “JPMorgan was forced to cut its dividend during the Great Recession, but has raised it in the 11 years since then. The payout ratio is also just 37% of earnings for this year, so we see the payout as safe barring a very deep recession.”
Walmart, Target and Costco
“Retail stocks lately have been quite strong -- not quite to the level that we’ve seen out of energy, but certain stocks in this group have been pretty impressive,” Kenwell said. “Specifically, I’m talking about Walmart and Costco. Despite market-wide volatility, both stocks have been roaring higher.”
Both hit new highs on Thursday, April 7, as Costco led the way higher following its impressive March sales report.
“Clearly, there are pockets of strength within the retail space, and traders are flocking to the few spaces that continue to exhibit relative strength,” Kenwell said.
“Walmart stock has been absolutely incredible and as a result, the bulls are looking for a pullback to buy,” he said. “When I look at the charts, I see a very clean breakout at the $152 area. If we get a mild pullback to this level, it may give buyers a great opportunity to get long.”
That’s especially true because smart buyers know pretty quickly whether support will fail or hold.
“It's a clear-cut level and if it fails, $150 or lower is in play,” Kenwell added. “If it holds, the stock should be pretty responsive to this area. I would especially like it if this dip would time up with a pullback to the 10-day moving average. If buyers show up here, it shows that longs have active control in Walmart stock.”
Walmart is a pullback name to watch, while Target stock is a rotation trade. Specifically, it’s enjoying a monthly-up rotation over $229.19.
“The stock poked its head above this level on Thursday, then slipped lower by the close,” Kenwell noted. “But Friday’s action left no doubt. Target stock gapped above this level, then held above it through this morning’s dip.”
The stock already hit the first upside target near $236. That’s the 61.8% retracement of the current range and the 200-day moving average.
But when we look beyond the daily chart, the potential really opens up.
“Above the first target area could open the door all the way up to $250, which is the 78.6% retracement,” Kenwell added. “If Target can get above that, we could be looking at a potential return to the highs.”
Kenwell says he doesn’t want to be too optimistic with Target, but it’s a high-quality retailer. “With Costco and Walmart making new highs, it’s not crazy to think that Target will be close behind,” he said.