Is TINA back? That is, There Is No Alternative to stocks, a theme through most of the bull market that could take on greater resonance with the stunning decline in bond yields in recent months.
The S&P 500 index (.SPX) just ended its best three months since September 2009, gaining 13.07%, which of course followed the fourth quarter’s drop that stopped just short of a 20% bear market at the Christmas Eve lows. A hefty portion of the gains were in stocks that act a lot like bonds. At the opposite end, the Nasdaq Composite (.IXIC) advanced 16.49% in the first quarter, capping its best three months since the March 2012 quarter, paced by technology shares less beholden to the economy’s overall growth.
The rally in stocks came against a slide in bond yields, which normally would support equities, but aroused fear of a weaker economy, especially after yields on longer maturities fell below those of short-term bills. The 10-year Treasury note’s yield slid 28 basis points in the quarter and 65 bps in the past two quarters, reflecting the Federal Reserve’s shift away from further interest-rate hikes. (A basis point equals 1/100th of a percentage point.)
Earlier, investors had been spooked by the U.S. three-month Treasury bill’s yield exceeding that of the benchmark 10-year note, a redoubtable portent of recession. By Friday, however, the more usual alignment between the two had been restored, albeit just barely, with the bill ending at 2.399% and the note at 2.407%. In any case, there could be reason to utter those dangerous words, that this time it’s different, in part because of the strength in corporate bond prices, which could be good news for dividend stocks.
Tight fiscal policy has signaled 10 of the past 10 recessions, according to Jim Paulsen, chief investment strategist at The Leuthold Group. The current inverted yield curve is unique in the post–World War II era because “fiscal juice is expanding, and has been doing so since 2016.” In other words, the yield curve has been Trumped by the stimulus in the tax cuts that took effect last year, he adds.
Still, the decline in bond yields, from a peak of about 3.25% on the 10-year Treasury last October, makes dividend-paying stocks the sweet spot in the market, according to a research note from BMO Capital Markets’ Brian Belski and Nicholas Roccanova.
Since 1992, when the Treasury 10-year yield has declined, the Dow Jones U.S. Select Dividend Index has outpaced the S&P 500. The iShares Select Dividend exchange-traded fund (DVY) tracks the index. The outperformance of dividend stocks was strongest when the 10-year yield was below its one-year average and declining, as it is now, the BMO strategists write. Absent a recession, the 3.26% yield on the ETF handily beats bonds.
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