Before the start of 2022, the prior 13 years had been nothing short of remarkable for investors. The broad-based S&P 500, which is typically viewed as the best indicator of health for both the U.S. economy and the stock market, surged 600% from its Great Recession low. That's a compounded rate of return of 17.7% annually.
As the old saying goes, though, what goes up, must come down. Year to date, the broad market index has lost 16%, and all the signs are pointing to the economy sliding into an official recession early next year.
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Although we recently endured two consecutive quarters of gross domestic product (GDP) contraction, the rule of thumb many use for a recession, the National Bureau of Economic Research says the definition is much less specific. It looks for "a significant decline in economic activity that is spread across the economy and lasts more than a few months."
We may be getting that soon. Perhaps the surest sign of a recession is on the way was Amazon and FedEx both announcing they were preparing to lay off tens of thousands of workers before Christmas. Still, there is no reason for you to panic.
The gathering storm
The Dallas branch of the Federal Reserve just released its latest regional report showing that its new orders index tumbled to a reading of negative 20.9 in November, making this the sixth straight month in negative territory and the lowest point since May 2020 during the depths of the pandemic. New order growth rates, capacity utilization, and shipments have all deteriorated for multiple months.
Manufacturers in the Fed survey had a mix of dour comments. One food manufacturer, for example, noted that while demand was still present, "there is just no cash to buy food." While a machinery manufacturer pointed to continued supply chain problems, a miscellaneous manufacturer said, "Our order backlog is growing because we cannot buy electronic components at any price."
One metal manufacturer declared, "Recession is coming! We are just waiting for the backlog to evaporate. Then layoffs start."
Indeed, JPMorgan Chase's Jamie Dimon said in October he expected the U.S. to fall into a recession within the next six to nine months because a "very, very serious" combination of problems would be buffeting businesses; inflation has risen to such a degree that the Federal Reserve is now overcorrecting to rein it in by drastically raising interest rates.
The silver lining amid the clouds
This is scary stuff, and investors do need to protect themselves, but not by burying their heads in the sand and hoping the storm blows over. Pulling all your money out of the stock market and stuffing it in a mattress is not a winning strategy.
As savvy investors know, market downturns are unique buying opportunities because former high-flying stocks are now available at far more reasonable valuations. But if a recession is coming, those high-flyers may still have further to fall.
Certainly, dollar-cost averaging is a worthwhile strategy to deploy, buying shares in good stocks with solid long-term potential that continue to fall. It means you acquire more shares when they're cheap and fewer when they're more expensive, all the while establishing a stake in a business that will rally when the storm passes.
Another option is to buy dividend stocks, which helps protect your portfolio as stock prices fall.
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Unparalleled opportunity
The asset managers at Hartford Financial Services looked at the performance of the S&P 500 going all the way back to 1930 and found that dividends contributed 40% to the total return of the index over that 91-year period.
They also found that from 1960 on, dividends represented an amazing 84% of the index's total return. Moreover, reinvesting dividends in the benchmark index, coupled with the power of compounding, would have turned a $10,000 investment into more than $4.9 million compared to just $795,823 that grubstake would have become based just on the index's price alone.
Even more remarkable, there has not been a single decade in which dividend stocks in the index didn't generate positive returns, even when the broader market was losing money for investors. That includes the so-called "lost decade" of the 2000s when the S&P 500 produced negative returns, but dividend-paying stocks in the index produced 1.8% positive returns.
Fortify your portfolio now with dividend stocks
Market corrections, bear markets, and recessions can all be painful times. It behooves investors to remain calm during such periods of turmoil and look at how to make lemonade from the lemons they've been handed.
As Warren Buffett has said, be fearful when others are greedy, and greedy when others are fearful. That doesn't mean buying stocks willy-nilly, but targeted investments like those that pay dividends will benefit you over the long haul.
