Stock Market Trips, But Fundamentals Remain Strong

I want to continue my thoughts from last month’s column, particularly against the backdrop of a stock market that is in full retreat since then. For all of us who watch our 401K and other non-retirement investment accounts, the last few weeks have been a nail-biter for some. 

Not me … I am not one to take retreats like the current correction in the three major indexes as a setback. Rather, I am a patient, long-term investor who sees the equity markets as a multi-decade investment opportunity.

Going back to the inception of the Dow Jones Industrial Average in 1896, the trend line over the past century and a quarter is a sawtooth upwards, confirming Warren Buffet’s basic advice: buy great companies and own them forever.

Case in Point. Let’s look at the S&P 500 as a case in point. The index hit a pre-pandemic high of 3,380 on Feb. 14, 2020, and between that date and March 20, it dropped to 2,304, a drop of over 1,000 points as the COVID pandemic scared the daylights out of the global equity markets, as the darkness of the unknown enshrouded us. 

But between that date and New Years Eve of 2021, the index rallied an astounding 2,500 points to 4,766, and at press time, it closed at 3,950, still almost 600 points above its high before COVID. The more narrowly focused, tech-heavy NASDAQ did even better, and the Dow Jones Industrial Average mirrored similar gains.

So what is there to complain about? Yes, I know stocks are down from their year-end highs, and even our firm’s own, internal index of construction materials stocks index is down 26% from their recent highs. 

But we are way ahead of where we were before the pandemic, and the markets are just catching their breath. And further, there are little snippets of information and metrics that filter across my screen daily that continue to bolster my enthusiasm for all the equity markets and point to further gains after this correction is behind us. 

For starters, Jay Powell was re-confirmed as the Fed Chair by the U.S. Senate last month, in an 80–19 vote that screams of confidence in his leadership, which I for one think he deserves. And then other little metrics have popped up in recent days: 

  • Union Pacific, a long-time favorite of mine, raised its dividend by 10% to $5.20 per share compared to $1.25 per share in 2012, or 10 years ago. 
  • Apple raised its dividend by 5% to $.92 a share; it was $.09 per share in 2012, a 10-fold increase.
  • Overall, the median first-quarter 2022 dividend increase in the S&P 500 was 9.52%, up from 8.46% in the fourth quarter of 2021, and up from 7.69% in the first quarter of 2021.

A Telling Indicator. But just as telling an indicator as these robust increases in dividend payments is earnings, which drive stock prices. 

The entire S&P 500 delivered $165 of earnings per share in 2019 pre-Covid, and now the estimate for 2022 is $230, followed by an eye-watering estimate of $245 to $260 for 2023 – let’s face it, earnings are strong and growing. We are estimated to be at earnings of nearly $100 per S&P 500 share ahead of 2019, a robust year prior to the pandemic.

Putting the broader markets aside, we have confidence that the IIJA has cast a huge safety net under the entire construction industry, and construction materials in particular. 

As I said last month, even if the rest of the economy stumbles, construction has $1.2 trillion in expenditures ahead of it. 

To be sure, the big unknown is how any further ratcheting of interest rates by the Fed could affect equities, but I have a lot of confidence in Jay Powell. 

Yes, any further action to staunch galloping inflation could result in the bitter pill of a further decline in the markets, but I am hoping he finds the right Goldilocks-type blend: not too hot, not too cold … just right. 

Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers and acquisitions. He has a career spanning almost five decades, and volunteers his time to educate the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected] Follow him on Twitter @allenvillere.

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