Talking Points – June 2019

June 26, 2019 – Current Dividend Yield Opportunities Are Bullish

Despite U.S. stock markets recently trading at new highs they, in at least one metric, have become even more attractive. The decline in interest rates and the steady increase in dividends has resulted in nearly half of S&P 500 stocks offering a higher dividend yield than the U.S. 10-Year Treasury Bond.

Source: Strategas

Many investors have long feared investing in dividend oriented strategies due to the risk of rising rates, which has failed to materialize. While our base case is rates stay at a low level for the foreseeable future, there are at least two key ways to help offset the potential risk rising rates may have on dividend strategies; focus on companies with a history and likely future of attractive dividend increases to help offset inflation and rising rates and focus on high quality. Those types of companies will not be nearly as harmed by rising rates as low quality firms.

June 12, 2019 – The Fed’s Decision on Rates is Critical to the Bull Market

Signs of a slowing economy and the trade wars have pushed interest rates sharply lower in recent weeks. In fact, the U.S. 2-Year Treasury yield is now notably lower than the Fed funds rate. Today, we look at how past Fed’s have handled such inversions and the dramatically different outcomes.

In both 1995 and 1998, when an inversion like this occurred, the Fed acted aggressively in cutting rates and the bull market continued; however, in 2000 and 2007, the Fed was much more apprehensive. By the time they began lowering rates it was too late to prevent a bear market.

Source: Strategas

Every situation is different. Rates are much lower now than in past instances, so we can’t say with certainty how this plays out; however, one of the most important things we have learned in our career is emphasized by this chart. Don’t Fight the Fed.

Source: Greg Towner, CFA, CMT