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)|
|Similar Dividends, Diverging Performance (2013 YTD)|
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 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.