Stocks push higher not on dividends; traces of risk aversion

Did you miss it? The stock market has been stretching higher and higher each day. Now that if your investment portfolio has not participated on the current push through historic highs, you are not be alone. There is definitely something driving stock prices higher, but it does not seem to be money from the average investor. Who is behind all the buying is more important than the fact that new records are getting destroyed almost daily.
The media argues that the floods of capital landing on our shores are seeking yield. They claim that, since Treasuries do not pay investors enough, these funds are goblin dividend paying stocks.
Low interest rates set by the Federal Reserve and their Quantitative Easing program are no doubt creating an environment where bond buyers are getting pushed away from Treasuries and towards other assets. But is yield what these bond holders are looking for? I argue that it isn't; at least not exclusively.

Normal behavior (2009 to present)

Under normal circumstances, stocks or sectors experiencing greater economic expansions would command a higher price than those with inferior potential growth performance. To see this normal behavior, look at the comparison chart of the FTSE Colombia 20 Index, with ticker symbol GXG, and the US Utilities Sector SPDR, with ticker symbol XLU. Because Colombia is going through the economic renaissance that's witnessing the formation of strong balance sheets by former debtor nations in Latin American, it has enjoyed great price appreciation since 2009. On the other hand, the US Utilities Sector's price performance during the same period has been as expected: boring. Normally, not one investor would brag to his mates about owning Utilities. It is like watching paint dry; there is no excitement at all.

Similar Dividends, Diverging Performance (2013 YTD)

But the story has reversed since the beginning of the year. Normal market rules have not applied. Economic success stories Peru (EPU) and Colombia (GXG) have lost about 10% of their value despite their great fundamentals. Contrasting this performance, US Utilities (XLU) and US Consumer Staples (XLP), sectors that would other wise stay flat, have gained between 17% and 20% in value in just four and a half months. These are incredible gains. The gap between exciting and boring assets has grown to about 27% in favor of the boring. Incredible!
Looking at the unusual divergence in pricing, one would be tempted to believe that the push for dividend income is what's creating the gap. The problem here is that all four assets in the chart offer great dividends. In fact, Peru's ETF (EPU) pays 3.63% while the US consumer staples SPDR pays only 2.71%. The other two fall in between. With similar dividend levels, there has to be a different reason behind the difference in price performance.
Risk seems to be the culprit. Money that would otherwise be invested in Treasuries, is now pushing boring sectors higher because these sectors normally experience lower levels of volatility. While dividends matter, perceived safety carries a much larger premium at this time of economic uncertainty. It should be clear that markets are thus pricing risk as if there was a great probability of trouble ahead.
Now that for all those not in the market, there are potential repercussion within the real economy. We have already experienced one economic slow down with all its associated problems in the ability to borrow or to find willing customers. A second swing lower would be most destructive for many businesses now residing at the margin.
I believe that the money that has driven the stock market higher has the characteristics of risk intolerant capital. I therefore think that a correction larger than three to four percent, the dividend being paid, would create a rush for the exits; leaving us all wondering what happened.

Wealth Redistribution House

I think that the present administration and its misguided ideals of wealth redistribution have created an air of uncertainty within the businesses environment. The result has been a complete unwillingness to invest in long term projects and of hiring new employees on the part of business owners. As a result, the economy has not improved despite a massive Federal Reserve intervention. This has created large pools of capital that have been looking for where to get some kind of return while keeping risk low. These funds demands a high degree of liquidity from their investments; a liquidity that would allow them to immediately exit positions in the event of drops in value. Not a great thing during jittery markets.
I certainly would prefer to see a robust recovery, but the signs do not support beliefs of a sound come back. If things were well, money would chase growth potential rather than safety. But as discussed, risk aversion is the call of the day.