Stocks finished sharply higher on Friday, snapping a five-day losing streak thanks in part to stronger than expected retail sales data and a moderation in inflation expectations. But Friday’s rally still was not enough to overcome three days of selling earlier in the week, leaving the three major market indexes with weekly losses of 1.6% for the Nasdaq, 0.9% for the S&P 500 and 0.2% for the Dow.

As we start the Q2 earnings season for US corporations, all eyes and ears are on the outlook that companies provide as the country wrestles with the prospect of a recession. With a 75 basis point increase in interest rate coming later this month at the Fed meeting, the bear is growling louder and it will likely take some broad-based beats and exceptionally rosy outlooks from US companies to get the bull bellowing again. 

With nowhere to hide, there is still one silver lining that investors can tap into – dividends.

Future Wealth’s View

While talk of peak inflation has become passé amongst pundits on CNBC, there is a saying on Wall Street – “Don’t fight the Fed ”. In dovish times, the Fed is a friend of Wall Street – lowering interest rates and buying riskier assets. In hawkish times, the coin is flipped over. It is unusual for the Fed to tighten so aggressively at a time when the economy is likely already in recession. But, the Fed has no choice but to raise interest rates aggressively to combat inflation that recorded the highest in decades at 9.1% in June.

But US corporations are increasing their dividend payouts showing Wall Street that they are still in good health and despite their challenges, they are confident about their business outlook. While the S&P is down 20% year to date, value and dividend stocks are down in the low to mid single digits. At Future Wealth LLC, the core position in our client portfolios is iShares Select Dividend ETF (DVY) – down only 4.63% year to date. The outperformance of dividend stocks highlights the rotation from growth stocks that began in early 2022. If you are not on that bus, the road ahead could get tricky. It is not rocket science but it takes research and patience.