JPM - All 133 Dividend Aristocrats Ranked By Lowest Volatility

2023-05-02 07:15:00 ET

Summary

• The stock market is likely to suffer a 15% to 30% correction in the coming months.
• The regional banking crisis, which just claimed First Republic, the 12th largest bank in America, is not a major threat to the economy.
• The debt ceiling crisis, 79 days to default and counting, threatens what Moody's, Fitch, and S&P describe as a "cataclysmic" financial disaster.
• According to the bond market, there is a 98.24% chance the debt ceiling will be raised, but possibly not until 24 to 72 hours before default.
• Low volatility aristocrats fell just 3% during the 2011 debt ceiling crisis, 85% less than the S&P. This article ranks all 133 aristocrats from lowest to highest volatility. Part 2 of this series will show you how to build the ultimate low-volatility aristocrat sleep-well-at-night portfolio to thrive during this bear market and get to the new bull market later this year.

This article was published on Dividend Kings on Monday, May 1st.

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The next few months could be very scary for investors who have been lulled into a false sense of security by the recent market rally.

Since WWII, we've never seen stocks bottom before a recession, and if history is any guide, the October bottoms weren't the final bottom.

(Source: Dividend Kings S&P 500 Valuation Tool.)

In addition to market history, the current earnings fundamentals also point to a likely significant correction coming in the next few months.

S&P Bear Market Bottom Scenarios

(Source: Dividend Kings S&P 500 Valuation Tool.)

Why You Shouldn't Sell Everything And Go To Cash

No one can consistently predict market bottoms, and the start of a new bull market is where much of the market's long-term returns come from.

Let's quickly walk through the risks investors are focused on right one, one of which is important and the other isn't.

Banking Crisis Isn't The Major Risk To Stocks

Since reporting earnings last Monday and disclosing that it was down to its last $20 billion in uninsured deposits (80% decline in 4 months), First Republic Bank (FRC) has fallen 85%.

• down 97% YTD
• down 99% from record highs
• and likely on its way to zero.

The FDIC is trying to put together a deal where it can announce FRC's acquisition by a healthy bank at the same time as they announce the FDIC is seizing it.

JPMorgan Chase & Co. (JPM) has agreed to buy First Republic , rescuing it from being seized by the FDIC.

• JPMorgan ended up buying it for undisclosed terms
• The House of Morgan has a rich history of rescuing failed banks, including in 1907, 2008, and now 2023

"As part of the transaction, First Republic Bank’s 84 offices in eight states will reopen as branches of JPMorgan Chase Bank, National Association, today during normal business hours,” the FDIC said in a statement.

“All depositors of First Republic Bank will become depositors of JPMorgan Chase Bank, National Association, and will have full access to all of their deposits.”

Jamie Dimon, chairman and CEO of JPMorgan, said its takeover minimized costs to the Deposit Insurance Fund.

“Our government invited us and others to step up, and we did,” he said in a statement. “This acquisition modestly benefits our company overall; it is accretive to shareholders, it helps further advance our wealth strategy, and it is complementary to our existing franchise.” - CNBC

It's important to remember that FRC, while the 12th largest bank in America at the start of the year, is special, in a bad way, just like SVB (SIVBQ), Signature Bank (SBNY), and Silvergate.

Specifically, FRC built its business on top of a mountain of jumbo mortgages, many of which were "interest-only," providing its rich clients (like Mark Zuckerberg) rock-bottom mortgage rates.

How low rate? In 2012, FRC let Zuckerberg refinance his house for $6 million at 1 %. However this was at a floating rate and is now higher.

Why give rich clients such a sweetheart deal? Because it's what got them to keep a lot of their cash at FRC, where it provided nearly free funding for the bank.

The trouble was that very low-rate mortgages, like bonds, lose a lot of value if rates increase. FRC is sitting on $27 billion in unrealized losses, and its net interest margin has gotten crushed.

That's because all but $20 billion in deposits have fled, and that was before the stock price fell 85% last week, likely causing the flight of most of its remaining deposits.

FRC's government loans, such as from the Fed, are at 4.8%, far below the rate on many of its jumbo mortgages.

Banking Crisis Is Contained According to The Stock Market

Unlike during the early days of the crisis, strong banks are no longer crashing. The market has finally realized that mega-banks and super regionals like USB, PNC, and TFC (all 3 were part of the FRC $30 billion rescue deposit coalition) are not going to fail.

After a short increase in financial stress created by the failure of SVB (4 banks in 11 days), financial stress has fallen to below-average levels once more.

0 on the St. Louis Financial Stress Index is average since 1993; during recessions, we average about 1.5.

In other words, at the peak of the crisis, financial stress temporarily rose from below-average levels and has now returned to pre-crisis levels.

The Chicago Fed's National Financial Condition index similarly shows no significant signs of stress other than its leverage sub-index.

Together St. Louis and Chicago Fed financial stress indexes track 123 metrics on a weekly basis, including lending levels, default rates, credit spreads, and yield curves.

If there was a financial crisis brewing, we'd see it in the data, and I'd let you know about it.

So, if the regional banking crisis is likely contained, what could cause the market to fall dramatically in the coming months?

Update On The Debt Ceiling Crisis Of 2023

• Why the Debt Ceiling Crisis Is Likely To Cause A Big Correction And Save Us From Default .

We're currently facing the highest default risk in U.S. history.

According to the bond market, that's still just a 1.763% chance of default.

For context, Goldman estimates the risk of nuclear war with Russia at 2.5%.

However, the debt default clock is ticking due to approximately $4.85 billion in daily deficit spending.

• according to Goldman
• and the monthly average pre-tax day
• and the daily average over the last year.

On April 26th, the Treasury's General Account, which normally has $500 to $800 billion in it, closed with $293 billion.

On June 15th, an estimated $110.75 billion in corporate taxes are expected, which is why Goldman thinks the account will go from $60 billion to $171 billion.

That pushes the default date back to July 19th, and Goldman thinks a final accounting maneuver by the Treasury that begins on June 30th will push it back a final 7 to 10 days to late July.

That's as long as Congress has to raise the debt ceiling, or else we get hit with what Moody's, S&P, and Fitch describe as a "cataclysmic" financial crisis.

According to Moody's, a 2-month default would be like the Pandemic on steroids.

• 4 million government employees, including the U.S. military, wouldn't be paid
• 69.1 million people collecting Social Security wouldn't get paid
• about 5 million Federal contractor employees wouldn't get paid
• 5.2 million veterans pensions would stop getting paid.

In total, around 80 million Americans would see their incomes slashed or go to zero. Government contractors don't get retroactive back pay.

And that is just the income effects of a default, which would instantly plunge the U.S. into a recession.

• 7.5 million job losses vs. 8 million during the Great Recession
• 4% to 5% decline in GDP vs. 4.6% during the GFC
• 33% to 38% decline in the stock market (up to a 47% peak decline from record highs)
• up to $16 trillion in stock market losses.

The good news is that the prospect of $16 trillion in stock market losses, not to mention the suffering of 80 million (just in the U.S.), is likely to get Congress to act.

In fact, a procedure called Discharge Petition would allow 218 House members to pass a debt ceiling increase even if Speaker McCarthy refused to bring it to the floor.

There are just two problems with this.

First, it requires 5 GOP members to join all 213 Democrats to get the necessary votes.

Second, this complex procedure takes 2.5 to 3 months and hasn't started yet.

We'll have passed the point of no return within a week, after which the Discharge Petition won't pass in time.

The Treasury, Fed, and White House have three primary options for averting a catastrophe if Congress fails to raise the debt ceiling.

The Fed can accept defaulted treasuries as collateral in its three lending facilities.

Fed minutes from a 2013 debt ceiling discussion show that Powell considers this a "loathsome" option but one he's willing to accept.

This wouldn't actually prevent a recession, but ensure good liquidity for banks if they need it.

The Treasury can print a $1 trillion platinum coin and deposit it at the NY Fed, and use that to pay the nation's bills.

Secretary of the Treasury Yellen has said this is an absurd option that would make the world think that the U.S. dollar is at risk of being inflated away because we can print money out of thin air.

I would point out that 15 years of QE worldwide has shown the world that this is the risk with all fiat currencies. In other words, the only thing more absurd than a $1 trillion platinum coin is voluntarily defaulting on the debt and triggering a global financial crisis.

Finally, President Biden could invoke section 4 of the 14th amendment and order Treasury to ignore the debt ceiling.

The validity of the United States public debt, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned." - 14th Amendment .

This was added to the U.S. Constitution after the Civil War to prevent southern state politicians from defaulting on debt taken on by the North during the war.

Invoking the 14th Amendment would likely end up in the Supreme Court, and it would be a messy fight, creating lots of financial uncertainty. But a lot less than a prolonged default that is 100% certain to plunge us into a severe recession.

Yellen and Biden have said they are not considering these options, which is what you'd expect them to say, lest they provide cover for Congress to drag its feet on raising the debt ceiling.

So most likely, the Problem Solver Caucus in the House will save us all from certain financial doom.

Problem Solver Caucus Debt Ceiling Framework

The Problem Solver Caucus is made up of 32 Democrats and 31 Republicans, and this is the framework they have proposed to raise the debt ceiling.

It's far from optimal, much like the 11th-hour 2011 agreement struck 2 days before the U.S. was set to default.

But given the realities we face today, it's also our best hope to prevent the Great Recession 2.0.

S&P and Goldman warn that given how tenuous Speaker McCarthy's position is in the House; we might come down to the final 24 to 72 hours before the debt ceiling is finally raised.

In other words, 2023's debt ceiling crisis might look a lot like 2011's.

Low Volatility Aristocrats: Helping You Sleep Well At Night During Debt Ceiling Crisis

Dividend aristocrats are historically lower volatility blue-chips that help you sleep well at night when the market falls hard and fast.

The average annual volatility of the aristocrats is 25% compared to 28% for the average standalone company.

But of course, low-volatility aristocrats tend to fall even less, especially when the reason for the decline is financial in nature.

• Low-volatility aristocrats tend to be recession resistant, with stable cash flow and strong balance sheets.

The five lowest volatility aristocrats averaged a 3% decline in the 2011 debt ceiling crisis, 85% less than the S&P.

In Part 2 of this series, I'll show you how to build the ultimate low-volatility aristocrat portfolio, but for now, here are all 133 dividend aristocrats, champions, kings, and global aristocrats ranked from lowest to highest average annual volatility over the last 15 years.

Bottom Line: Low Volatility Aristocrats Could Be Just What You Need For The Market Mayhem That's Likely Coming Soon

Remember that this ranking ignores valuation and all fundamentals except for volatility. Don't blindly buy the 5, 10, or 20 lowest volatility aristocrats.

In Part 2 of this series, I'll show you how to build the ultimate low-volatility aristocrat portfolio.

A portfolio that can help you sleep well during even the most extreme market crashes while still earning solid returns and generous, safe, and steadily rising income in all economic conditions.

A portfolio that might be just what you need to survive and thrive through the coming chaos so you can profit from the new bull market that's likely starting within a few months.

For further details see:

All 133 Dividend Aristocrats Ranked By Lowest Volatility