Talking Points – January 2019

Jan 30, 2019 – Easy to See Why Investors Moved so Much Money into Dividend Stocks

With the huge outperformance of Growth over Value in recent years it is understandable why investors had begun to forget about dividend oriented strategies. That all changed in a big way last quarter with the largest inflows in recent history to both dividend growth and high dividend strategies, as we can see in our first chart.

Undoubtedly, much of this excitement for dividends was the result of a flight to quality and relative stability during market volatility. We also think the shift down in interest rates was a big factor. The 10-year yield was as high as 3.25% in October, but reached a low of 2.55% in December and sits at just 2.7% today. While different asset classes and investment styles inevitably have good and bad periods, we feel strongly that dividend growth will remain an attractive investment style for many years to come.

Jan 16, 2019 – The Fed Could Create a Major Increase Stock Specific Risk

This week’s email goes a little deeper than normal, but we feel this is an important topic for investors and especially advisors right now.

The quantitative easing (QE) of the past nearly decade has come to an end. The Fed has been raising rates and just as importantly is regularly decreasing the size of their balance sheet. This quantitative tightening (QT) could dramatically increase what is known as non-systematic risk, or stock specific risk.

As we see below, since the recovery of the financial crisis the market itself has explained the vast majority of market returns and risk. We have remained well below the long-term typical levels of stock specific risk.

QE provided for ample and often excess liquidity. By keeping rates low and money available a large number of companies were able to lever up their balance sheets. This allowed them to survive or even prosper longer than they would have in a normal environment. Now that QE is gone and QT has begun we believe that more and more skeletons will come out of the closet.

The old saying of “it will be a stock pickers market” might finally hold true for active managers. More importantly, we think it will become increasingly critical to focus on quality assets with a risk management discipline. For those of us with short selling strategies, there could be increased opportunities. 

This shift could occur over many years, or events could cause it all at once. One of the most important sayings we remind ourselves of is “don’t fight the Fed.” The shift from QE to QT and its potential ramifications make that saying all the more critical.

Jan 2, 2019 – As Good as it Gets

Despite all the recent market volatility, the U.S. economy has mostly stayed positive. In fact, the job market continues to reach new low levels of unemployment. This is of course great news for those seeking jobs and those asking for raises.

Our chart today though gives us reason to pause and consider what the end of a business cycle looks like. Are we at such a low point where if unemployment flattens out or ticks higher a recession, like the shaded periods below, are on the horizon?

Source: Gluskin Sheff

Stock markets and economies don’t always move in lock stop. Often markets foreshadow as yet unseen economic issues, or perhaps just the natural end of a business cycle. Is that what stocks are telling us now, or is this just a non-recession correction like in 2011 and 2015/2016?

Source: Greg Towner, CFA, CMT