- Stock market turbulence over the last two weeks has left investors scrambling to figure out what could possibly provide some relief.
- Morgan Stanley has pinpointed what it thinks could be a surprising source of equity appreciation through the end of May.
The past couple weeks have featured a raging tug-of-war in the stock market— one the bulls have mostly lost. But if history is any indication, relief from a surprising source is on the way.
Global investor accounts will receive dividend payments totaling a record $400 billion during the period from March through May, according to Morgan Stanley. And while that’s undoubtedly great for individual traders, it could also serve as a saving grace of sort for flailing equities indexes at large.
The question then becomes: How are these dividend payments going to lift the stock market? After all, if the companies who paid them absorb a future hit to cash flow, won’t the two factors cancel each other out?
Not so fast, says Morgan Stanley.
“The reality is that stocks fall less than would be implied by the amount of dividends paid, and a systematic strategy (‘equity carry’) which gets long the dividend stocks has produced excess risk premium over the last 20 years,” Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, wrote in a client note.
Given the upcoming windfall of corporate payouts, that premium afforded by so-called dividend stocks should spur outperformance throughout the spring. It’s a dynamic that’s played out under the surface of the stock market on an annual basis, and helps explain why spring has been a historically strong period, said Sheets.
If this does play out, it would come as a welcome surprise to many traders who have been frantically trying to find any silver lining to the recent turbulence that’s rocked equities. As they’ve been talking themselves out of a trade war and recalculating the effect of the new tax bill, this dividend tailwind has been lurking all along, waiting to provide much-needed assistance.
With all of that established, let’s remind ourselves why a stock market rally would be such a life-saver at this current juncture. Despite some strong daily rallies — including a 1.4% surge on Thursday — the benchmark S&P 500 is still down more than 4% over the last two weeks. Meanwhile, the MSCI All-Country World index has fallen 3.3% over the same period.
If the dividend-driven rebound forecasted by Sheets does occur, it would uphold the year-end outlook put forth by his colleague Mike Wilson, Morgan Stanley’s chief US equity strategist. Wilson is calling for the S&P 500 to finish 2018 at 2,750, which is 4% higher than its last closing level.
“The high season for dividends we are heading into can thus be supportive for owning equities,” said Sheets. “April in particular tends to be a strong month for global equity returns.
(Read Business Insider’s recent in-depth interview with Morgan Stanley chief US equity strategist Mike Wilson here.)
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