Unexpectedly Intriguing!
August 17, 2015

After a rough July, in which the number of U.S. firms announcing dividend cuts directly paced what we saw during the first quarter of 2015, it would appear that the U.S. economy in August is shaping up to be much less severe. Our near real time indicator of the relative level of economic distress in the U.S. economy is now suggesting only that recessionary conditions are present in the U.S. economy in August 2015, rather than the kind of contraction that we observed in the near-zero growth of first quarter.

Cumulative Number of Announced Dividend Cuts by Day of Quarter, 2015-Q1, Q2 and Q3, Snapshot on 2015-08-14

But instead of being a cause for celebration, we have to address a significant and growing cause for concern. The main thing that drove the heightened level of distress in the U.S. economy back in 2015-Q1 was the fall of crude oil prices below $50 per barrel, which primarily hammered small-to-mid-sized U.S. oil producers, many of whom responded by slashing their cash dividend payments to their shareholder owners, while they also slashed their plans for expansion, which in turn, negatively affected things like durable goods providers.

Those negative conditions abated during the second quarter of 2015 as crude oil prices stabilized, but over the past month, crude oil prices have once again resumed their significant decline, with the price of West Texas Intermediate crude oil falling by almost 20% since mid-July 2015.

As we saw back in January 2015, the number of dividend cut announcements for U.S. oil and gas extraction firms lagged behind the declines in price that had begun soon after 4 July 2014. We think that if the decline is not reversed, whether by an improvement in the oil industry's overall fundamentals or the devaluation of the U.S. dollar, it is likely that the level of distress in this sector of the U.S. economy will once again increase, forcing an increased number of firms to cut their dividends.

The big question for investors is how long can oil prices continue falling or remain depressed below their previous levels before the level of distress in the industry expands to its largest producers. Already, the decline in oil prices is negatively impacting the earnings of firms such as Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), who are already on track to reduce their new exploration and production operations.

With the decline in oil prices to date, Exxon Mobil has already fallen from being the largest component by market capitalization in the S&P 500 to now be the index' third largest firm, while Chevron has dropped out of the S&P 500's Top 20 component firms altogether. Even so reduced, should these firms act to cut their dividends, the effect will be felt across the entire index.

So we're left with the question of whether what we're seeing now is a growing level of calm in the U.S. economy and stock market, or is what we're seeing now just the calm before the storm hits?

Data Sources

Seeking Alpha Market Currents. Filtered for Dividends. [Online Database]. Accessed 15 August 2015.

Wall Street Journal. Dividend Declarations. [Online Database]. Accessed 15 August 2015.

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