TINA (‘there is no alternative’ to stocks which there never is in a bull market) and the dividend yield on stocks being higher than many bonds are the two main reasons being given for the persistent strength in large cap stocks. I don’t mean to pick on any one company but I want to use one as an example that if you’re going to ‘search for yield’ in stocks, remember that the potential for capital loss should be part of the analysis as it’s not just all reward. If one bought Equity Residential, the large apartment REIT on Monday because the 2.9% yield was so compelling relative to the 1.55% 10 yr bond yield, the stock lost 5.5% yesterday after a disappointing earnings report. Stocks are riskier than bonds as we all know and therefore comparing bond yields and dividends is an apples and oranges comparison. I’ll also ask this question, where is the historical study that shows a tight correlation with future equity returns when the earnings yield on the stock market is higher by a certain level against the risk free rate? There isn’t one because there isn’t a high correlation. Remember the Fed model? I found this chart from Mark Hulbert last week:
My point is that the world’s central banks have no question left the investing landscape in disarray but I just wanted to bring some further perspective to some of the reasons some are giving to buy stocks as opposed to fundamental and valuation driven reasons.
The US market response to the FOMC statement was most interesting and confusing. The statement sounded a bit more hawkish as we know which I think was the right thing to do so as to give them flexibility. But, their game of day trading the data continues as they go back and forth depending what the monthly payroll numbers are. On one hand, the yield curve flattened further with the 2s/10s spread narrower by another 3 bps to just below 78 bps. On the other, the US dollar fell, gold rallied, stocks did nothing and the 2 yr yield still dropped. I think the real message is there are real global growth concerns and the belief that there is little chance the Fed hikes rates. Anecdotally, a major source of strength for the US economy over the past 5 years has been auto sales and Ford’s CEO today after the earnings release said he is expecting a y/o/y decline in retail in the 2nd half and said he can argue the SAAR for auto’s has peaked in this cycle.
Today, a day before we see the first look at Q2 GDP, the Atlanta Fed’s estimate today took a large 5 tenths cut to just 1.8% after seeing the advance trade and inventory data. Here is the link, https://www.frbatlanta.org/
The world of monetary madness now shifts to Japan and the yen rally and 1.1% fall in the Nikkei overnight just points to the jitteriness over what will be announced. The expectations bar is high but we should all expect only more of the same type of easing and please don’t expect a different result.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.