Market Pulse: A world turned upside down?
Every day is an adventure. Fed chair Powell’s ill-advised comment about future rate cuts, which he soon took back, sent stocks lower last week. Then a strong market turned south after President Trump announced that more tariffs on Chinese goods might be coming on Sept. 1. China retaliated.
There always seems to be something to trigger short-term moves and volatility.
Hedge fund manager Kyle Bass, a recent guest on CNBC, said (tongue-in-cheek) that people are buying bonds and long-term assets (real estate, for example) for growth and stocks for income, the opposite of investment patterns going back more than 100 years. Yes, the market is crazy right now.
Here’s another example: In Europe and Japan half of all bonds have negative yields. Bonds have rallied here as well to a level at which the 10-year Treasury now yields 1.63%. Investors have seen growth and capital gains in bonds (and preferreds) and will see more, but low yields are a problem for income-oriented investors.
Money flowing into bond ETFs and funds this year is running at a $500 billion annual rate, and that alone has propelled prices and driven down yields. In Europe the ECB will soon push rates further below zero, which is one reason the Fed lowered rates and indicated that more cuts may be coming soon … or not.
Bonds and utilities have rallied. But low and falling bond rates will force more and more people to look to stocks for income.
When it comes to stocks, earnings matter the most. Earnings in the second quarter were better than expected and GDP edged up 2.1%, held back by shrinking inventories. All important final sales to domestic buyers rose 3.5%, better than the year-ago quarter. That shows a healthy economy.
Overseas sales were relatively weak and compounded by a stronger dollar. Full-year earnings growth is estimated to be 6%, down from 20% last year. Economists who got it wrong last year and the year before will probably get it wrong again. Earnings growth will exceed 6%. Couple that with low and falling interest rates that make bonds less and less attractive and the stock market will have a strong tailwind.
That’s why I continue to like the more conservative dividend paying stocks. Merck (MRK) is not a victim of the trade war and yields 2.63%. AT&T (T) yields 5.98%. Or consider the PowerShares Low Volatility ETF (SPLV).
The short-term moves are unnerving, but the positive long-term picture is a different story. Let’s remember that.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.