Dow: Watch the Fundamentals Now
Two consecutive days of "risk off" -- that's closer to what we might expect for September. The DowJones Industrial Average (INDEX: ^DJI) and the S&P 500 (INDEX: ^GSPC) caught a European chill, declining 0.3% and 0.6%, respectively. The VIX Index (INDEX: ^VIX) , the so-called "fear index,"perked up nicely, rising 8.9%. Investors sold risk assets across the board: Stocks, junk bonds, oil and gold were all down today (yes, I consider gold as a risk asset.) We may be witnessing the limits of central bank action as fundamentals -- and fundamental risks --begin to overwhelm sentiment.
Speaking of unwelcome fundamental indicators, The Economist's Buttonwood column flagged some research from Wainwright Economics today that highlights the widening in the corporate bond spread -- the premium investors require over the risk-free rate to lend money to companies. According to David Ranson of Wainwright, the increase in the spread is typically an indicator of a global slowdown.
As Buttonwood points out, "The current move in spreads is about one percentage point; previous shifts have been two points or more so this is not a decisive signal, yet." However, if one believes (as I do) that companies will be lowering their earnings guidance over the next few months (as Caterpillar (NYS: CAT) did two days ago), one might expect the spread to continue widening -- lower profits hurt companies' ability to meet debt payments. I could be the victim of confirmation bias here, but I believe this is just another sign that investors should batten down the hatches as we near the fourth quarter: Volatility cannot be suppressed eternally, it must out eventually. In that environment, investors will be glad for lower-volatility equity returns generated by dividend stocks, foremost among which are The 3 Dow Stocks Dividend Investors Need.
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