Sullivan's Market Sense: An investment column offering perspective on today's market noise
A Dozen Anomalies Encountered in Your Search for Yield
While on a car trip recently I began chronicling all of the weird things going on right now. Gary Partridge, a colleague at RIM, and I came up with twenty-six in a little under two hours. One broad-reaching anomaly is the difficulty of the search for yield. Not only have investors been yield-starved for a number of years, but the search has gotten harder each year. Below are twelve anomalies that speak to the search for yield.
- Extremely low bond yields - Regardless of the part of the bond market you search in, yields are historically low. Whether buying short Treasury bills at a yield of 0.02% or ten-year corporate bonds at 3%, yields are low.
- Corporates below stocks - It has been a very long time, if ever, that the average investment-grade bond yielded less than the average yield of the S&P 500.
- QE - Quantitative Easing, or the governmental buying of bonds in the open market, is being done at unheard-of levels. Currently the Federal Reserve is buying $85 billion a month. This pumps an additional $85 billion into the markets and economy each month. This and previous actions have increased the Fed balance sheet to over $3 trillion from $1 trillion in 2007.
- Japanese stimulus - After twenty years of recession, job losses and deflation, Japan now intends to reflate and stimulate. Proportionally the Japanese stimulation is far more aggressive than what’s been done in the United States or the European Union. The effects are also more dramatic. Large stock market gains, immediate currency devaluation and ballooning exports are making Abenomics look like a winning strategy. For the US, Japan’s results will bring deflation and lower production.
- Super Mario - Mario Draghi, the European Central Bank head, has jawboned European interest rates down. Spanish rates fell from 7% to 5% because Draghi promised to support Spain's bonds. He has not had to actually act on that promise yet, but his promises alone drove Spanish government bond yields down---and the effect has extended to Greece and Italy as well.
- Defensive stocks lead the charge - Unlike most record-setting stock market moves, this one is being led by utilities, pharmaceuticals and consumer staples. How odd is that? All of these sectors perform better in a poor economy. It is hard for investors to become euphoric about utilities, but they are. The available yields in this area are driving the prices higher.
- Tech stocks with yield - In a sign that the tech sector is maturing, many tech stocks now have a respectable yield. Even Apple has a decent dividend. Gone are the days of extremely fast growth and big cash needs. Investors’ thirst for yield has tempted these growth companies into paying a dividend.
- Low-yield bank stocks - Prior to the crash banks were among the best yielding stocks in the market. After large losses and heightened regulation, dividends were cut or eliminated. Even after many increases this sector still yields less than the market.
- High corporate cash levels - In the recession companies hunkered down, stopped spending, got efficient and hoarded cash. Most are still building cash. The sum of the collected cash is a record. In the fourth year of a recovery we should be seeing capital spending, not higher cash levels.
- A dearth of mergers and acquisitions - Companies are not merging or buying other businesses. Again, at this point in the cycle, companies should be acquiring others to shore up growth rates: more signs of cash hoarding.
- Corporate shyness - Managements of corporations seem shy to build, buy, extend or leverage their companies. After being burned in 2008, managements have a conservative rather than aggressive attitude about their future. In the movie Patton, General George Patton suggests that General Lucian Truscott should guard against being too conservative. Very few managements are talking like that.
- Consumer Debt Service - After reaching a peak in 2008, household debt service as a percentage of disposable income has plummeted. It has dropped to levels below any time since 1980. While debt is lower though still historically high, the monthly payment is very reasonable. Consumers are building their balance sheets too.
Since the recession America has gotten religious about cutting debt, spending less and building cash. That cash is chasing yields that are being held low by Central Banks. Interestingly investors in bonds continue to buy at lower and lower yields. Meanwhile, stock investors reap the benefits of excess liquidity as stocks increasingly become the only alternative.
© Regions Bank, Member FDIC. The foregoing represents the opinions of the author, Brian Sullivan, and not necessarily those of Regions Bank or Regions Investment Management, Inc. (RIM). RIM provides commentary to clients of Regions Bank, an affiliated company wholly owned by Regions Financial Corporation. The information contained in this report is based on sources believed to be reliable but is not guaranteed as to accuracy and does not purport to be a complete analysis of the security, company or industry involved. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This report is designed to provide commentary on market strategy and the opinions expressed reflect the judgment of the author as of the date of publication and are subject to change without notice. RIM assumes no responsibility or liability for any loss that may directly or indirectly result from the use of such information by you or any other person. Investments discussed in this report are not FDIC-insured, not deposits of Regions Bank or its affiliates, not guaranteed by Regions Bank or its affiliates, not insured by any government agency, and may go down in value. Investment advisory services are offered through RIM, a Registered Investment Adviser. RIM is wholly owned by RFC Financial Services Holding LLC, which in turn, is a wholly owned subsidiary of Regions Financial Corporation.