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The S&P 500 fell as much as 7% in May before a late rally helped the U.S. stock market benchmark finish the month roughly flat, holding the index’s year-to-date loss at about 13%. 

The market’s elevated volatility this year reflects growing tension between today’s strong economic environment and the storm clouds forming due to inflation, rising rates, and supply chain stress.

Speaking at an investment banking conference on June 1, JPMorgan Chase Chairman and CEO Jamie Dimon provided a fair recap:

“Right now, it’s kind of sunny, things are doing fine. Everyone thinks the Fed can handle this. That hurricane is right out there down the road coming our way. We just don’t know if it’s a minor one or Superstorm Sandy.”

High fuel prices, rising grocery bills, increasing borrowing costs, and other price pressures pose a threat to consumer spending, which drives about 70% of the U.S. economy.

Mr. Dimon estimates consumers are still sitting on $2 trillion in pandemic-era savings that can help support spending for at least the next six to nine months. But the outlook is increasingly murky.U.S. consumer sentiment fell to a decade low in May, the personal savings rate sits at its lowest level since September 2008, credit card balances have surged in part to help cover a higher cost of living, and the Fed has just begun tightening financial conditions at its most aggressive pace in two decades to fight inflation.

Will the Fed manage to achieve a so-called soft landing where inflation is tamed, and economic growth merely slows? Or will inflation push America into a deep recession, pricking what, in hindsight, were various asset bubbles fueled by years of easy money policy? 

Persistent inflation has widened the range of potential outcomes, and we will know a lot more about the economic outlook by the end of this year. 

Your guess is as good as mine regarding where this random walk will go, but I don’t recommend spending much energy worrying about things I can’t control such as the market’s short-term performance.

Owning equities requires a certain level of comfort with unpredictable but inevitable bouts of volatility. That risk is the price we pay for the higher long-term returns offered by stocks compared to bonds and certain other asset classes. 

As billionaire investor Charlie Munger opined in an interview, we need to maintain a stable emotional state no matter the market’s performance:

“I’ve had my Berkshire stock decline by 50% three times. It doesn’t bother me that much. That’s just a natural consequence of adult life, properly lived. If you have my attitude, it doesn’t really matter. I always liked Kipling’s expression in that poem called ‘If’. And he said, ‘Success and failure.’ He says, ‘Treat those two imposters just the same.’ You just roll with it. Sometimes it’s going for you, and some against, it’s all part of the same game.”

Owning time-tested, profitable businesses and maintaining an asset allocation that doesn’t keep you up at night can help manage the stressful feelings that often accompany falling stock prices.

It can also help to remember that no one can time the stock market or economy with any consistency. Markets are far too complex and interconnected with variables that cannot be forecasted reliably. If nothing else, the last two years should have made that clear.

Instead, now is a good time to tune out all the noise that can tempt an investor to deviate from his or her long-term plan. 

The next time you read a fearmongering article about an inevitable downturn or imminent stock market crash, remember this 2018 study by the International Monetary Fund (IMF) that looked at how well economists forecast recessions.

Studying 63 countries from 1992 to 2014, the IMF observed 153 recessions, defined by a drop in economic output. In April of the year before the recession, forecasters expected output to fall in only 5 of these 153 cases. 

Even by October of the year of the recession, when a downturn was already well underway, consensus estimates still did not call for a recession in 35 of the 153 observed contractions. This was true for the 2008 global financial crisis, which was not officially declared a recession until a year after it started.

For income investors, the good news is that recessions don’t happen often. And over the past 60 years, S&P 500 dividends have not declined outside of a recession, according to Goldman Sachs. 

The bad news is we aren’t smart enough to know when the next downturn will hit. That is why we designed our Dividend Safety Score system to assess dividend risk over a full economic cycle.

If a business seems unlikely to withstand a recession with its dividend intact, the company will earn a speculative rating from us, even if the payout can be maintained until then. 

Our long-term approach reduces score volatility and helps investors manage risk in their portfolios before it becomes a problem when the tide goes out. 

We monitor our Dividend Safety Scores daily, investigating the latest corporate earnings reports, price shocks, news, and more to ensure you always have thorough, up-to-date assessments of dividend risk at your fingertips. 

If we ever change a company’s score, we will immediately email investors a note explaining the upgrade or downgrade.

Despite growing anxiety about the economy’s trajectory, the environment for dividends has remained healthy. 

During May, several large Canadian banks announced their second dividend raises of the year, home improvement retailer Lowe’s hiked its payout by 31%, iconic farm equipment manufacturer Deere lifted its dividend by 7.6%, railroad giant Union Pacific pushed through a 10% dividend increase, and medical device maker Medtronic delivered a 7.9% raise. 

As we discussed last month, quality dividend stocks generally continue to serve as a safe harbor in this choppy market as recession fears mount. Our defensively tilted portfolios have remained relatively resilient and should continue throwing off reliable dividend income. 

The future is as hard as ever to predict with the Fed beginning to take liquidity out of the market and some firms struggling to pass along rising costs for labor, materials, and freight. We will continue monitoring the latest developments and provide company-specific updates as needed.

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