Stocks Rock And Roll
“Roll, tide, Roll!” Stocks are rolling like Alabama’s Crimson Tide in Monday’s College Football Championship. On Tuesday, stocks reached 386 consecutive trading days without a 5% “correction.” That’s their second longest such streak and one more week would bring a new record on January 18.
Volatile markets are often preludes to unsettling dips while this record stability shows the broad strength of the stock market. Low tides always follow high tides but the overall stock market is continuing its historical growth. Its performance over the past year has been well above its average but its ten-year growth since the strains of the 2007-2009 Great Recession is actually below historical growth rates. The market might pause to catch its breath but an accelerating global economy provides a foundation for further gains for stocks.
That is probably not true for bonds. Bond yields are creeping up with both the key 10-year and 30-year Treasury yields trading above levels that have held for 25 years. Bond prices go down when yields go up and the closely watched 10-year yield is trading at 2.6%, its highest level since March. The 30-year yield rose slightly above 2.9%, continuing a steady climb from its 2016 historic low of 2.11%.
Bond prices have been falling for decades. After the 2007-2009, the Federal Reserve led global central banks to lower rates and buy bonds in a successful effort to mitigate and reverse the effects of the Financial Crisis. These efforts were largely successful, encouraging a 10-year rally in stock prices supported by bond prices as bond yields fell to historic lows.
With the Federal Reserve having indicated a probable triple in interest rates this year, bond prices will come under increasing pressure. The competitive attractions of stocks will provide further pressures. AbbVie (ABBV-$99) and Amgen (AMGN-$182), for example, two strong buy recommendations in the growth medical sector both have dividend yields just below 3%, well above the 10-year Treasury bond yield. They have both increased their dividends for several years and will doubtlessly continue this practice. Interest payments on bonds never go up, thus I see no reason why anyone would prefer to own almost any bond at today’s rates. Even a growth stock like Apple (AAPL-$173), still my favorite recommendation, offers an attractive 1.4% yield, with almost certain dividend increases ahead.
Although stocks usually hog the financial news, the bond market is larger. It serves both corporations and governments, who have enthusiastically taken advantage of the low rates prevailing in recent years. The global bond market now exceeds $100 trillion, slightly more than half the value of global stock markets. In the US, bond markets make up about $40 trillion, twice the domestic stock market value of around $20 trillion.
Governments are required to use the bond markets, as are many corporations, particularly regulated companies like banks and insurance companies. Stocks have been a cheaper source of capital for most corporations, as they do not require interest payments. Additionally, many bond investors are risk-averse, preferring the apparent stability of bonds. With pressures building on bonds, their reputations will suffer along with their prices. This will probably translate into some pressure on stock prices, however, their growth potential make them a clear preference today to bonds.
Both the stock and bond markets markets will probably display greater volatility this year. “Rock and roll is here to stay.” (Neil Young) This calls for stocks that combine growth with gravitas like recent recommendation Royal Dutch Shell (RDS-A; $70). Earnings are headed up, the company is increasing its commitment to renewable energy and its dividends offer a current 5.4% yield. Financial stocks should benefit from higher rates. Best of breed are Morgan Stanley (MS-$54). JP Morgan Chase (JPM-$110) and Bank of America (BAC-$30.)
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/800.697.2622