April 2020
COVID-19 Slams Markets. What Can Correlations Reveal About Our Potential Post-Pandemic Market?
A Revealing Look at Correlations During the Drawdown

If you were thinking that virtually everything went down during this coronavirus-driven drawdown, you would not be entirely wrong. Indeed, the average correlation of stocks in the S&P 500 during the current drawdown has been 0.82. For comparison purposes, in the difficult fourth quarter of 2018, the average correlation was only 0.63. But if everything went down together, don’t be so sure that everything will go up together. In 2019 (which seems like decades ago), the average correlation fell to 0.49. And it wasn’t as if 2019 was a dramatically different economic environment than the fall of 2018.

While we can’t predict the longer-term impacts of this pandemic shutdown, it certainly seems likely that there will be lingering recessionary challenges in the medium term and, perhaps, longer-term structural changes. If correlations fell to 0.49 in a straightforward year like 2019, it may very well be that correlations turn out to be even lower in a post-pandemic recovery.

Maintaining a Long-Term Strategy: A Psychological Challenge

First things first, investors should maintain a disciplined longer-term investment strategy, which for most should mean buying some equities (averaging in) to rebalance investments per target asset allocations. In volatile times like these, it can be extremely psychologically challenging to stick to this discipline, and for those whose psychological reserves will be tapped out by maintaining this discipline, please don’t let the perfect be the enemy of the good—rebalance into broad indices. But there is likely value to be added by asking at least some key post-pandemic questions. Is the energy sector permanently impaired? Can bricks-and-mortar retail come back? Are high-yielding equities too at risk in what may be a U-shaped and not a V-shaped recovery? Are we finally going to spend money on infrastructure?

CHART OF THE MONTH: Correlation Comparison
Correlations rose dramatically in the recent drawdown—but might fall even more dramatically in a post-pandemic environment. After all, just because much of it went down together doesn’t mean it’ll come back up together.

Sources: Bloomberg. Correlations of S&P 500 stocks during the current period (02/19/20-03/31/20), during the fourth quarter of 2018, and during 2019.


Even U.S. bonds were in the red in March.

Returns of various common market segments

Source: Bloomberg.

Equity Perspectives
Dividend Growth Investing for a Post-Pandemic World

The onset and spread of COVID-19 have brought about unprecedented impacts on our lives and the financial markets. Monetary response from the Fed to help address the crisis came first, and Congress recently passed over $2 trillion in fiscal measures. Here, we highlight three important issues for dividend investors to consider.

The Stimulus Bill Impact on Dividends

One of the components of the CARES Act stimulus bill is a lending program in which the Treasury Department can provide businesses up to $500 billion in loans, guarantees, and investments. The program includes restrictions on the companies that choose to participate. Companies receiving federal assistance will, among other restrictions, be prohibited from paying a dividend for a period of time. This means that investors who rely on their equity portfolios to produce income may face a reduction in their dividends.

Distinguishing Between the Types of Dividend Stocks

Not all dividend-paying stocks are created equal. Generally, there are two broad categories of dividend paying stocks—dividend growers, and high dividend yielders. Historically, high-quality companies that have continuously grown their dividends have displayed durable business models, stable earnings, solid fundamentals, and strong histories of profit and growth. And as a result, strategies featuring dividend growth companies have exhibited strong performance characteristics under a wide range of market conditions. Conversely, there are many companies that pay high dividend yields that often appeal to income-seeking investors. Many lesser-quality stocks tend to use greater portions of their earnings and cash flows to pay their dividends. This means they often times have less financial flexibility when their underlying businesses suffer.

Regardless of which companies ultimately accept assistance from the stimulus bill, many analysts expect a wave of companies to cut, suspend, or eliminate their dividends simply as a means of preserving liquidity. Of course, there’s no way to predict for certain which companies will accept the stimulus package, or to know what companies may adapt their dividend policies for other reasons. However, it may potentially serve as an indicator that certain companies have grown their dividends during previous downturns; there may be precedent of their willingness and ability to grow their dividends again, despite challenging markets. It remains to be seen if other companies, such as those with only a short history of paying dividends, or those with particularly high yields, prioritize sustaining dividends in these environments.

What Could All This Mean for Dividend Growth Investing?

While much remains uncertain, the highest-quality companies have, however, proven their ability to grow their dividends over time. And they have demonstrated an ability to survive through a range of market environments, even raising dividends after previous recessions. Let’s take, for example, the S&P 500® Dividend Aristocrats®—an elite group of companies that have grown their dividends for at least 25 consecutive years. The most recent annual dividends paid by S&P 500 Dividend Aristocrats companies were, on average, approximately 46% of their free cash flows. This means that Aristocrats’ dividends were well covered, as their dividends amounted to slightly less than half of their available cash flows. By contrast, there are approximately 150 members of the broader S&P 500 with either negative free cash-flow payout ratios or payout ratios that are higher than those of the Aristocrats.

Looking back on other historic drawdowns, companies with the longest historical track records of dividend growth have tended to lose less as the market goes down and outperform when the market rebounds. While we’re certainly in unprecedented times, in these cases, dividend growth strategies demonstrated their worth for investors’ portfolios. Could they be positioned to do so again?

Fixed Income Perspectives
COVID-19 Ignites Unprecedented Moves by the Fed

During the month of March, not only did the Federal Reserve Bank cut the federal funds rate to nearly zero, a move not made since the financial crisis, but it also announced that it would be taking unprecedented moves in order to help stabilize the markets. Details of the program, titled the Secondary Market Corporate Credit Facility, were released on March 23 and allow for the Fed to purchase investment grade corporate bonds as well as investment grade corporate bond ETFs as the Fed expands its balance sheet. With respect to investment grade corporate bond ETFs, the Fed may buy up to 20% of the assets of any ETF that provides broad exposure to the investment grade bond market.

News of the stimulus and the direct intervention in the investment grade corporate bond market helped to support investment grade corporate bond performance, which had suffered earlier in the month. Prior to the announcement, investment grade credit spreads had spiked 247 basis points (bps) as investors grew concerned with the state of the economy. During the same time period, from March 1 to March 23, investment grade corporate bonds fell 13.18%.1

The additional stimulus measures helped the investment grade corporate bond market bounce back 7.02% through March 31. Overall, however, the investment grade corporate bond market was down 7.09% for the month.

And what about high yield? High-yield spreads had widened nearly 900 bps prior to the stimulus and intervention announcement. By the end of the month, high-yield spreads had retracted almost 200 bps of that widening. While the Fed’s purchases were restricted to the investment grade market, high yield benefited from the overall stabilization of credit markets and the anticipated benefits of the overall stimulus package.

Flight to Safety Continues

While corporate bonds struggled to perform, a flight to safety was still evident among the Treasury market as the segment posted positive returns of 2.89%.2 The 10-year Treasury yield itself was fairly volatile during the month, ranging from a low of 0.54% to a high of 1.19%, ending the month at 0.67%. The aggregate bond market was fairly flat for the month, falling 0.59%.3

Implications of the Fed’s Stimulus Package for Fixed Income Performance

In purchasing both corporate bonds and corporate bond ETFs, the Fed’s stimulus plan (if effective) will likely drive both credit spreads and liquidity premiums lower. The question is, can Treasury yields themselves go much lower? Ten-year Treasury yield is at an all-time low and may rise in a return to normalized levels. In order to capture the benefit of tightening credit spreads following their recent blowout, investors may find corporate bond strategies that hedge interest rate risk to be a prudent investment.

1Corporate bond performance measured by the Bloomberg Barclays US Corporate Bond Index.
2Treasury bond performance measured by the Bloomberg Barclays US Treasury Index
3Aggregate bond performance measured by the Bloomberg Barclays US Agg Index

ProShares Investment Strategy Team

Source for data and statistics: Bloomberg, FactSet

The different market segments represented in the chart use the following indexes: US Large Cap: S&P 500 TR; US Large Cap Growth: S&P 500 Growth TR; U.S. Large Cap Value: S&P 500 Value TR; U.S. Mid Cap: S&P Mid Cap TR; U.S. Small Cap: S&P U.S. 600 SC TR; International Developed Stocks: MSCI Daily TR NET EAFE; Emerging Markets Stocks: MSCI Daily TR Net Emerging Markets; Global Infrastructure: Dow Jones Brookfield Global Infrastructure Composite; Commodities: Bloomberg Commodity TR; U.S. Bonds: Bloomberg Barclays U.S. Aggregate; U.S. High Yield: Bloomberg Barclays Corporate High Yield; International Developed Bonds: Bloomberg Barclays Global Agg ex-USD; Emerging Market Bonds: DBIQ Emerging Markets USD Liquid Balanced.

This is not intended to be investment advice.

Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Any forward-looking statements herein are based on expectations of ProShare Advisors LLC at this time. Whether or not actual results and developments will conform to ProShare Advisors LLC's expectations and predictions, however, is subject to a number of risks and uncertainties, including general economic, market and business conditions; changes in laws or regulations or other actions made by governmental authorities or regulatory bodies; and other world economic and political developments. ProShare Advisors LLC undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Investing involves risk, including the possible loss of principal. This information is not meant to be investment advice.

Bonds will decrease in value as interest rates rise. International investments may also involve risks from geographic concentration, differences in valuation and valuation times, unfavorable fluctuations in currency, differences in generally accepted accounting principles, and economic or political instability. In emerging markets, many risks are heightened, and lower trading volumes may occur.


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