In 2022, Chairman Jay Powell of the Federal Reserve stopped printing money for nine months in response to high inflation rates. This decision led to a significant downturn in the stock market, with stocks falling by 18% and bonds performing even worse. The iShares 20+ Year Treasury Bond ETF lost 31% in value, signaling the impact of the lack of liquidity on the financial markets. Despite the economic conditions not being in a recession, the performance of the stock market showed the importance of liquidity in driving investor sentiment and market performance.
The liquidity provided by Jay Powell’s money printer in 2021 had fueled inflation, which led to the Fed tightening its monetary policy in 2022. However, this austerity measures lasted only nine months before the Federal Reserve had to reverse course due to a crisis in the UK bond market. Higher interest rates had caused UK gilt prices to fall, prompting the Bank of England to intervene by buying bonds with newly printed money. The US Fed followed suit and introduced quiet QE, funneling money back into the financial system to stabilize bank reserves and prevent further bank failures.
The injection of liquidity back into the financial system by the Federal Reserve led to a new bull market, with assets like gold and Bitcoin reaching all-time highs. Stocks also began to rise, signaling a shift in investor sentiment towards riskier assets. Dividend growers emerged as attractive investment opportunities during this time, as they provided a steady income stream and the potential for capital appreciation. Dividend stocks were seen as a way to hedge against inflation and attract trend-following investors who could drive up share prices.
One example of a dividend grower that provided a buying opportunity during a pullback was Amgen, a biotech company with a focus on rare disease treatments. The company’s steady dividend payouts and potential for growth in the rare disease market made it an attractive investment. Following positive test results for a weight loss drug and the Fed’s announcement of further monetary easing, Amgen’s share price rose by 14%, resulting in significant gains for investors. The success of Amgen highlighted the importance of identifying undervalued dividend growers during periods of market volatility.
As the Federal Reserve continues to provide liquidity to support the financial system, investors are advised to focus on high-quality dividend stocks that offer stability and growth potential. Market conditions may fluctuate, but dividend growers have historically outperformed during times of economic uncertainty. By identifying undervalued dividend growers, investors can capitalize on temporary mispricing and position themselves for long-term success. With the money printing season in full swing, now is the time to focus on income-generating investments that can provide consistent returns in a volatile market environment.
