Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

A Steep Market Correction May Be On The Horizon

Published 11/19/2021, 04:58 AM
Updated 09/20/2023, 06:34 AM

This article was written exclusively for Investing.com.

With inflation running at some of its hottest levels in decades, there has been an increasing focus on real yields and real earnings. Therefore, it seems appropriate to explore something different, the real dividend yield of the S&P 500.

The results are interesting and surprising. When we discount the consumer price index's current value from the dividend yield of the S&P it suggests there is trouble ahead for the stock market. 

The dividend yield for the S&P 500 is approaching record low levels, to begin with, even when not adjusting for inflation. Levels that have not been seen since the late 1990s. It should not be surprising that valuations for the S&P 500 reflect the same froth in the market when looking at the PE ratio of the index.

What is startling is what happens to the current dividend yield of the S&P 500 when adjusting for the consumer price index.S&P Dividend Yield

The "real" dividend yield of the S&P 500 is currently -4.9%, its lowest level since October 1981. The real dividend yield doesn't typically get to these levels. In fact, in modern times it has only been lower in 1974 and 1980. After that, it has never been lower than -3.1%. That is because every time the dividend yield, when adjusted for the CPI, falls below -2.5%, the S&P 500 has a massive market correction, which leads to the yield moving sharply higher. 

In 1990, 2000, and 2008 the real dividend yield fell to -2.7%, -2.6%, and -3.1%, respectively. What happened next was far from pretty. 

From the summer of 1990 through the fall, the S&P 500 fell nearly 20%. From March 2000 until October 2002, the S&P 500 fell more than 47%. From August 2008 until March 2009, the S&P 500 fell more than 46%

It wasn't any better in 1973 and 1974 when the S&P 500 also fell by more than 48%. The 1980 episode seemed to be delayed, with the decline not coming until 1981 but when it did hit the S&P 500 fell almost 26%. 

The only time that there wasn't a massive sell-off when the real dividend yield fell to -2.5% or more was in 2005. S&P Dividend Yield/CPI Vs. S&P

During each period where the real dividend yield fell sharply, it was due to very high inflation and a US recession. That is likely the reason why the market did not correct in 2005, there was no recession. However, there was a recession in the other cases, with higher consumer prices the contributing factor.

Now, the reason why the S&P 500 has likely endured this very low real dividend yield currently is because investors probably still believe that inflation is transitory and will not be persistently high. If investors begin to think that inflation is not transitory, it could lead to fears of a potential recession.  

It is unclear, at this point, if a recession is on the horizon. Third-quarter growth in the US was much weaker than expected, and there are signs currently of slowing global growth. However, early indications are that GDP growth thus far in the fourth quarter has bounced back sharply. S&P Dividend Yield/CPI

If inflation becomes more persistent, leading to a recession as it has in the past, a steep market sell-off will be just around the corner, just like it always has. 

Latest comments

Inflation will cause a recession but the mkt hasnt been a real market since pre 2008. You cant use philosophy from the 80s to predict it. As equities are measured in dollars, a weak dollar can also lead to stronger equity prices even when traditional fundamentals dont support it. Id rather be in equities than the dollar.
Although I agree with the possibility of a market correction, I think that repurchase-buyback programs maybe distort the comparison, because this is a indirect retribution the enterprises uses to "pay" shareholders, and is a type a retribution increased last years. Don't you think so?
sounds great
The market, in most of time, plays opposite as you suggested.lol
December 6th it will crash
What makes you think that?
ooh there will be quite a correction when FED accelerates tapering or even raise the rates.
very insightful review deep analysis
You will be right eventually as all perpetual top callers are in time.
Great article. But will probably not be very popular since stonks only go up
When you least expect it, 4200..
or not
this author always says this. he likes to scare his readers
😂
?
this has been delayed by massive quantities easing
Absolutely right! Just lets use straightforward wording, not QE but massive money printing
All valuation parameters are pointing to the fact that the current status are breaking all/most historical records. Any textbook would theoritically/rationally point towards "recession/market collapse", it is long overdue and plsssss take the last train (exit your equity position now and insured yourself with the precious metal - allocated basis) before it departs "unexpectedly.
Many market participants doesn't care about fundamentals. It's all about riding the waves... from one extreme overvaluation to another. Find the next big wave and jump of before it breaks. It's a game - not investing.
Already steep market corrections on many stocks 30% drops past month alone. Only QQQ most overpriced of them all are still up.
Megacaps keeps indices high while medium and small caps suffer
Agreed, lost of small and middle size cap stocks down 20-30% after earnings. Zoom, Paypal, AAPS, Fubo, Magnite, UPST, Fedex, Nike... there is nothing left to correct there. Now, the markets being pushed by the big cap corporations, who are not so affected by the supply chain issues, inflation, fed interest rise, etc. They control big market share, have well established supply chains, lots of capital and good credit scores.
Apple and Amazon are affected by supply chain... But Apple used the EV words and Amazon used the Black Friday words and fomo arrives and people buy like a mute
MMT is only an experiment with results still pending
Agree- everything is loom and gloom- his clients must have had no loss in cash trap but lost huge opp cost of growing- 863 articles of fear for himsef
Has anyone seen the articles posted by this guy?! Most are filled with fear and negative speculation. I guess investing.com needs thier fair share of market speculators as well
That's because probability of a crash happening increases everyday the market is reckless and everyday more and more people buy without care of actual financial value throwing out price dreams based on nothing but hope.
yes. agree
So what? If the author is consistent in his believe it gives more credibility to his articles
Stonk only goes up
Inflation will continue, interest rates will rise and if we don't go into recession it'll damned well feel like it.
stock market is going higher all the 2022
And what is the alternative? Where are positive real yields?
Bitcoin
a correction is always a possibility, ignore the noise and DCA always
Thanks for helping me keep my feet firm to the ground
Every day people of the world consume eat up $1trillion. every thing is gone. they are hungry for more printing
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.