• U.S. stocks’ remarkable recovery that began on March 23 picked up steam this week as investors cheered the prospect of a gradual reopening of the U.S. economy. Markets received an additional boost as reports emerged of a possible treatment for the coronavirus and the Fed reasserted its support for the economy.
  • Underneath the strong market rebound, however, economic data shows that the U.S. economy continues to face considerable challenges. At -4.8% in Q1 2020, U.S. GDP came in at its lowest figure since Q4 2008, and economists expect a much larger decline in Q2. Meanwhile, The Conference Board reported a nearly 32-point decline in consumer confidence, driven by a 90-point plunge – the largest ever – in consumers’ assessment of current business and labor market conditions.1  
  • Against this backdrop, companies have increasingly turned to cutting or suspending their dividends as they look to preserve cash. With approximately $70 billion in lost dividends, Bloomberg estimates that more companies have cut dividends year to date than in the previous 10 years combined.2 Continued economic stress poses the possibility that significantly more companies could follow suit in the coming quarters.
  • This is important because roughly 50% of the S&P 500’s total return over the past 30-plus years has come from reinvested dividends, as the chart highlights.3
  • The large majority of companies will likely continue to pay all of their dividends throughout the crisis. Yet a marginal or notable decline could be a sign that investors may need to temper their total return expectations despite stocks’ recent bounce.

1 The Conference Board, http://bit.ly/32vCXCP.
2 Bloomberg, “Money Stuff: It’s a Good Time to Cut Dividends,” https://bloom.bg/3bQT1Dc.
3 Bloomberg Finance, L.P., for the period from January 1988 through March 2020.

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