By Nikolay Stoykov, Managing Director, Alaric Securities
If anybody had asked me 12 months ago where do I think SPX will be in May 2020 if unemployment in the US, and most developed countries, is near 20% I probably would have laughed it off as a ridiculous question. However, if that person insisted, I probably would have said something like 1000 for SPX and 10000 for Dow Industrial.
On May 24 2019 SPX closed 2826 with unemployment at around 4% and on May 21 2020 SPX closed 2948 with unemployment at least 14% and probably closer to 20%, if expectations for May 2020 are to be taken into account. What is going on here, many people are asking – economic data is abysmal and expected to continue to be bad but markets seem oblivious and actually trading at a higher level than a year ago when economic data was actually quite good…
That is a very difficult question to answer as markets tend to move without giving us a clear explanation why but I believe that the answer/explanation lies in the interest rate environment we are facing. Let’s take a look at some historical comparisons:
In 2000, SPX dividend yield was around 1.1% with 30 year Treasury bonds trading at 5.8%.
In 2007, SPX dividend yield was around 1.9% with 30 year Treasury bonds trading at 4.6%
In May 2019, SPX dividend yield was around 1.9% with 30 year Treasury bonds trading at 3%.
In May 2020, SPX dividend yield was around 2% with 30 year Treasury bonds trading at 1.4%.
It is true that everybody expects the future dividend yield in SPX to be lower than the 12-month historical yield but even with a hefty drop of 30%, which is a lot worse than most expectations, SPX dividend yield will be still higher than the 30 year Treasury bond yield. From a historical perspective, unless there are waves of defaults and SPX dividends are cut by more than 50%, equity markets still offer quite good value relative to government bond yields.
Now with yields so low, I can not help but remember Alan Greenspan’s words – “People buying government bonds here are desirous for losing money” but they are still buying them… Anyway, all I am trying to say is that equity markets seem to be a lot more attractive investment than US government bonds.
In this low-interest rate environment, I feel like the Fed is pushing investors into risky assets and if there is anything I learned in 2009 is that one should not fight the Fed… Here is what I like:
- Equity Markets – broad cap ETFs like SPY or still distressed sectors like XLE or EEM
- High Yield Markets – HYG/JNK ETFs, still yielding nearly 7% with a 5-year maturity
- Hybrid Securities – PFF (preferred stock ETF), CWB (convertible bond ETF)
This is not a recommendation. The information provided is an objective and independent explanation of the matter. Alaric Securities OOD and other entities of the group do not trade in the above financial instruments.
Information on this page contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. Alaric Securities OOD does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature.
Investing in financial instruments involves a great deal of risk, including the loss of all or a portion of your investment. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.
Alaric Securities OOD will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on information provided on this page.