12/15/2018

Unique Market Perspectives – Crisis Events, Treasury Yields and Dividend Yields

Our research team has recently started highlighting some interesting market insights and macroeconomic trends they follow that impact decision making on individual securities. We would like to share these unique insights with our readers. Last month we covered topics like US Automakers, Signals from the US Yield Curve, Small-Cap Stocks and the US Dollar.

This month we will tackle the following topics:

  • Crisis Events & The Returns That Follow
  • Treasury Yields
  • Dividend Yields

Stock Market Returns after Crisis Events

October is a good month to revisit the often reliable axion that every 8 years the market has a crash event, and every 8 years market investors appear to forget this fact. Perhaps, a useful inquiry is to look at what happens to the market after crisis events.

Source: Pan Maestro

Returns for periods from 1 week to 1 year are, on average, positive. Many attribute the positive returns to a Federal Reserve that reacts to crisis events, even those of it’s own making, with an accommodation of easier monetary policy.

Dividend Yields and Relative Valuation

Earlier this year, yields on short term treasuries exceeded bond yields for the first time in 10 years. US  investors have an increasingly attractive choice between guaranteed returns on short term government bonds and dividend yields.

Source: Financial Times

However, low rates in much of the rest of the world appear to make dividend paying stocks attractive. Barron’s recently noted that nearly 40% of non US stocks in the MSCI index paid dividends over 3%. With German and Japanese 10 year yields close to zero, stocks in these countries can look attractive on a relative basis.

Source: Barron’s

The Race to Higher US Yields

Before rallying in recent days, the widely watched 30 year US Treasury bond traded above 3.25%, a level many chartists have alluded to as portending much higher rates. While a move to still higher, potentially much higher long end rates might be underway, comparative yields on foreign sovereigns should act to constrain the pace of the move.

Source: CNBC

The US 10 year government yield is the benchmark for global comparisons, and here we see a story of relative valuation. First the spread to Germany:

Source: Financial Times

Though not widely watched, the spread between US and Chinese 10 year rates shows a similar tale of relative valuation. A view on much higher US rates in the short term includes a view on these spreads and just how high and fast rates in the major economies also move.

Source: Daily Shot

Looking at just the US market, the pace of the move, as highlighted in this chart from the Daily Shot blog, has been the fastest, by these metrics, move in 26 years.  The Treasury losing streak, on a total return basis, has been the longest in 26 years.

Source: Daily Shot

In the short run, equity market weakness will likely come from sources other than higher US rates.


To review previous market perspectives, click the following links:
Unique Market Perspectives – US Automakers, Small Cap Stocks & Yield Curve Signals
Unique Market Perspectives – Trade Wars, Global Banking and the Housing Market

About Paul Blinn 5 Articles

Managing Director of Toreador Research and Trading

About Paul Blinn 5 Articles

Managing Director of Toreador Research and Trading