Stocks just gave up an important advantage they've held over bonds
The recent bond market sell-off lifted Treasury yields to their highest levels of in a year.
That jump pushed the benchmark 10-year Treasury note's yield above the dividend yield on the S&P 500 for the first time since last year.
Before this reversal, investors who were seeking higher yields flocked to the stock market as global bond yields continued to fall and even turned negative in some countries. Specifically, investors bought into so-called bond proxies like utilities and consumer staples stocks that tend to offer stable, bond-like returns.
However, those proxies have been "decimated" since President-elect Donald Trump won the election last week, said Dave Lutz, the head of Exchange Traded Funds at JonesTrading. That's because there was more competition from the higher-yielding bonds that these stocks are proxies of.
In November 2015, Fundstrat Co-founder and Strategist Tom Lee said "stocks are the new bonds" after the S&P 500 dividend yield jumped above the yield on the benchmark 10-year note. Lee also identified companies like Walmart and Coca-Cola, whose dividend yields were higher than their corporate-bond yields at the time.
This reversal in dividend and bond yields should not lower the appeal of bond proxies, according to Kelly Bogdanov, a portfolio analyst at RBC Wealth Management.
For one, bond yields surged to levels most forecasters didn't see coming as investors bet that Trump's fiscal-spending plans would boost domestic demand and inflation. However, there's still considerable uncertainty about when and how infrastructure spending will rise, and some strategists cautioned that traders were getting ahead of themselves with their bets on higher inflation. On Tuesday, Treasurys rallied and yields fell for the first time in a week.
"While high-yielding dividend stocks may have fits and starts in coming months as the bond market adjusts to the Trump administration, we continue to believe they should be core holdings for income-oriented investors," Bogdanov said in a recent client note.
"Fundamentals are still sturdy; cash flows are strong. As interest rates stabilize, these stocks should follow suit. In the meantime, they kick off attractive dividend payments."
- 2 states where home prices are falling because there are too many houses and not enough buyers
- US buys 81 Soviet-era combat aircraft from Russia's ally costing on average less than $20,000 each, report says
- A couple accidentally shipped their cat in an Amazon return package. It arrived safely 6 days later, hundreds of miles away.
- BenQ Zowie XL2546X review – Monitor for the serious gamers
- 9 health benefits of drinking sugarcane juice in summer
- 10 benefits of incorporating almond oil into your daily diet
- From heart health to detoxification: 10 reasons to eat beetroot
- Why did a NASA spacecraft suddenly start talking gibberish after more than 45 years of operation? What fixed it?