By Tim Courtney, Chief Investment Officer
As investors, there are certain things we look for when making decisions. When buying debt, we often look at creditworthiness, loan term and real yield. For stocks, we look at cash flow, profitability, growth and price. Investors have considered these and other fundamentals in buy and sell decisions for generations. While the fundamentals have remained largely the same over time, economic and regulatory backdrops are always changing.
One example of this is dividends. Companies in the 1940s to the 1980s generally paid out in dividends a much larger portion of their profits than they do today. Dividend yields during these decades ranged between 3% and 7%, and the average dividend yield was 4.4%.1 But economics and management’s view of tax efficiency has changed. Today, companies see more reason to reinvest more of their profits for future growth. Company management also generally sees the double taxation on dividends (first at the company level and again at the shareholder level) as a less efficient way to get company growth into the hands of the shareholder. The current dividend yield on the S&P 500* is around 1.5%1, although yields are somewhat higher internationally.
Another example is the number of publicly traded companies. The Wilshire 5000 Total Market Index* once represented a broad array of U.S. equities and was recognized as the gauge for the broad market. That was decades ago when there were more than 7,000 publicly traded companies. However, the index no longer exists in its original form since there are only about 3,500 publicly traded companies today.2 Increased regulations and costs have caused many potential listing companies to stay away. At the same time, private markets have grown and matured. Private markets provide capital that companies need to operate and remain private.3
Turning to the debt markets, the role of banks has dramatically changed post-2008 financial crisis. Regulations such as Dodd-Frank have restricted traditional bank lending, particularly to smaller, mid-market and regional businesses.4 This void has been filled by a burgeoning private credit market, now estimated at $1.5 trillion5 and growing. For commercial real estate, increasing interest rates after decades of declines and more employees working from home have caused investors to re-evaluate properties, even those in the most desirable locations.6
This is all to say that economic and regulatory environments change, and markets change with them. Even when events appear to be trending in obvious and certain ways, the environment and markets can evolve in ways we can’t predict. This is certainly true this year with an election, increasing antitrust activity and accelerating deglobalization.
As investors though, we have tools to help us weather these changes. As listed above, the fundamentals investors consider when making decisions have remained largely the same through the decades. They help us focus on what we can control—managing risk, being disciplined on price and maintaining adequate diversification. If you have any questions, please contact your Exencial advisor.
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*The S&P 500® Index (S&P 500®) is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
*The FT Wilshire 5000 Index (FTW5000), formerly known as the Wilshire 5000 Total Market Index (TMWX), is a broad-based market capitalization-weighted index that seeks to capture 100% of the United States investable market. Originally named for the near 5000 stocks it contained at inception, the index roster has since fallen to and sits at approximately 3500 stocks. The composition of the index is reviewed and adjusted monthly and is therefore subject to change.
