Powell’s Plan To Exorcise Inflation Echoes Early 1980s Volcker Crusade

With few exceptions, stocks last week were savaged in the wake of comments made by Federal Reserve Chairman Jerome Powell that all but assured a half-point rate hike at the Federal Open Market Committee’s upcoming May meeting. During a panel discussion at the International Monetary Fund, Powell channeled his best Paul Volcker and strongly suggested that the Fed may unleash multiple half-point hikes this year if inflation does not show signs of cooling.

Markets responded to Powell’s hawkish talk in a way that seemed to take into account renewed respect for the determination of the man who sounds like he is making it his mission to get a grip on inflation. Several of Powell’s fellow FOMC governors have also been vociferous in advocating large and frequent rate hikes to combat inflation. Crude oil was down 4.6% for the week—falling for five of the past seven weeks—and the 10-year U.S. Treasury yield finished Friday back above 2.90% at its highest level since December 2018.

Erasing gains from earlier in the week, the S&P 500 sold off on Thursday afternoon and ended the week lower by 2.7%. Real estate and consumer staples were the only two sectors to score weekly gains, albeit small ones, while sectors that benefit from higher inflation fared the worst: Energy (XLE
XLE
) was down 4.8% and materials (XLB
XLB
) fell 3.7%. Value (-2.0%) stocks didn’t get hit as hard as growth (-3.8%), but both were in the red for the week.

More than four decades ago, Paul Volcker held Jerome Powell’s job and was a warrior fighting a similar battle against inflation early in his reign heading the Fed from 1979 to 1987. President Jimmy Carter appointed 6-foot, 7-inch, cigar-smoking “Tall Paul” to be the 12th Federal Reserve chairman, tasked specifically with putting a lid on runaway inflation.

When Volcker took office in August 1979, consumer price inflation, like it is today, was running at an annual clip of 9%. The effective federal funds rate was 10.7%. Three months into Volcker’s term, it was up to 15.3%. Inflation stubbornly continued to climb, peaking at 14.8% in March 1980. Volcker met the demon blow-for-blow, jacking the funds rate to 19.5% by April, even though the economy had already slipped into recession in January.

Volcker continued to tighten the money supply and hike borrowing rates until inflation was dead and buried, and March 1980 proved to be a watershed month, after which inflation started a 40-year stretch when it averaged 3.3% and only very rarely got above 5%.

Stocks suffered collateral damage while Volcker waged war on inflation, gaining no ground the first three years of his chairmanship, but in August 1982, the market began an epic bull run that would gallop for the next 18 years. An investment in the Vanguard 500 Index mutual fund, the only way to track the S&P 500 back then, had doubled in value by October 1983 since the start of Volcker’s term 50 months earlier. It was just a preview of what followed the next two decades. Not counting fees or taxes, a $10,000 investment in the S&P 500 when Volcker took his Fed job in 1979 would multiply nearly 14-fold into $148,737 at the bull market’s peak in April 2000.

This has been the story of the stock market for the past 150 years: periods of short-term pain in between those of much bigger gains in the fullness of time. If Powell and the Fed slay the inflation dragon, the battle will likely claim casualties, but turn out to be a positive for stocks down the road. Just don’t invest money that you need to put your hands on next month.

Equity Income Universe: Even with a decline of almost 2% this week, the Alerian MLP (AMLP
AMLP
-1.8%) ETF is still the year’s biggest winner in the world of yield, up 22.2% year-to-date. A handful of high-yielding dividend funds with YTD returns between 5.3% and 7.7% distantly trail the AMLP, which yields 7%.

During a week when very few equities gained ground, the worst place to be if you were chasing yields was in mortgage REITs. The iShares Mortgage Real Estate Capped (REM -4.3%) ETF yields a juicy 6.7%, but the magnitude of the price decline this week alone consumed nearly two-thirds of that income. The REM now ranks dead-last among dividend-focused funds for year-to-date total return, down 11.8% since the start of 2022.

Other exceptional losers last week included PowerShares International Dividend Achievers (PID -2.7%), Vanguard International Dividend Appreciation (VIG
VIG
VIGI
I -2.6%), and the professionally-managed Buffalo Dividend Focus (BUFDX -2.4%), which is down 4.5% year-to-date and comes with a grabby 0.94% expense ratio, compared to a svelte 0.07% for the SPDR S&P 500 High Dividend (SPY
PY
SPY
D
SPYD
-0.85%), an ETF with a total return of 6.5% so far this year.

The positive standouts last week, and over the past several weeks, were real estate investment trusts, a group you might not expect to perform well when markets are unnerved about the prospect of higher rates. The iShares Cohen & Steers REIT (ICF
ICF
+1.11%) ETF had been down more than 12% last month, but it’s battled back to a year-to-date decline of 4.1%.

The 28-stock Forbes Dividend Investor portfolio was almost breakeven (-0.02%) for the week and the return was third-best among dividend funds we track, trailing only the aforementioned ICF and PowerShares High Yield Dividend Achievers (PEY
PEY
+0.05%). PEY currently ranks #5 for YTD total return, up 5.8% since the start of the year.

FDI Portfolio Action: The biggest winner was Big Blue. International Business Machines (IBM +9.2%) exploded higher on Wednesday after reporting better than expected quarterly results and hiking its sales and profit forecast for the rest of the year. Revenue from cloud services, IBM’s latest growth business, were up 14% year-over-year. Although the dividend is still undeclared, IBM will have an ex-dividend date the second week of May for a payout at least matching $1.64 paid out last quarter—but don’t be surprised if it’s higher by at least a penny. IBM has increased dividends by a compound annual rate of 8.5% over the past 10 years.

Deletion: It pains me to cast aside a rich dividend-payer like AbbVie
ABBV
(ABBV -4.5%), but the past two weeks have been brutal, and shares of the pharmaceutical colossus finished the week at $154.99, just 0.74% below its 10% trailing stop at $156.14. A look at insider activity offers little in the way of confidence. Four AbbVie directors and officers have unloaded more than $16 million worth of company stock since March 1, at prices between $147.29 and $159.21. Having just pocketed a dividend of $1.41 per share from ABBV 10 days ago, we will follow insiders out the door. Earnings are due next Friday, April 29. Perhaps they won’t be good, and that’s why insiders have unloaded stock. Even after the steep drop, AbbVie is still up 43.8% since we added it to the portfolio six months ago. Perhaps we’ll get back into ABBV if the price drops below $140 where the yield climbs back above 4% and it looks simply irresistible.

Additions: None for now, as more attractive entry points may appear next week. Depending upon market action, I may send out hotlines to buy one or more of several stocks that look attractive now, but would be even better deals at lower prices. These include home builder M.D.C. Holdings (MDC $36.27), with a fat 5.4% dividend yield and ex-dividend date in two weeks; Maryland-based television station owner Sinclair Broadcast Group
SBGI
(SBGI $23.33), which yields 4.3% and reports earnings first week of May; and class B shares of Ohio-based barrel maker and packaging company Greif (GEF.B $61.35), good for a yield of 4.4% with mildly positive insider buying trends this year.

To view the complete 28-stock Forbes Dividend Investor portfolio, click here to begin your 90-day risk-free subscription to Forbes Divdend Investor and/or Forbes Premium Income Report, both of which are written and edited by John Dobosz, author of this article.