Concerns over trade and global politics pushed markets lower last week. The S&P 500 slipped 0.5%. Global stocks, as measured by the MSCI ACWI, dropped 0.7%. The Bloomberg BarCap Aggregate Bond Index declined 0.5% based on solid U.S. economic data and concerns increasing oil prices may push other prices higher.
Key points for the week
- Interest rates are now above dividend yield rates.
- Buybacks are high as corporations benefit from using cash from overseas and lower taxes.
- Total yield offers a better indicator of returns than dividend yield alone.
As interest rates continue to increase, some investors are becoming concerned the higher yields available from bonds will cause investors to rotate out of stocks. For the first time since 2007, an investment in ultra-short-term government debt pays more interest than the same investment in stocks pays in dividends.
This type of analysis can help gauge the value of one investment relative to another. As rates increase, bonds become more competitive than stocks and investors who have taken on more risk in search of yield are able to rotate toward safer investments.
However, focusing on dividends ignores the changing nature of corporations’ cash returns to investors. The accompanying chart shows companies are buying back their own stock at higher levels than what they are paying out in dividends. The chart also shows stock buybacks didn’t become meaningful until the 1980s, so historical analyses of dividends understate how much money corporations typically return to investors.
Corporate tax reform has provided additional cash to reinvest in businesses, pay dividends, and buy back stock. Not only are taxes lower, but many companies are bringing cash currently kept in overseas accounts back to the U.S. When the analysis includes buybacks in addition to dividends, bonds don’t offer the same level of competition as stocks when only dividends are counted.
Source: Financial Analysts Journal, 3Q 2017, Phillip Straehl and Roger Ibbotson
Fun story of the week
Olesja Schemjakowa of France recently enjoyed a slice of cake and cup of coffee at a small café in Switzerland where her bill was $23.76. So you can imagine her surprise when her bank statement later read she had a $7,732 charge. Turns out when entering the tip, Schemjakowa accidentally entered in her pin number: 7686. The transaction is legally binding, so she contacted the café owner, who agreed to refund her. Contact then ceased between the two parties, after which Schemjakowa discovered the café had closed its doors. She has yet to receive her money.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.