The U.S. stock market as measured by the S&P 500 was up 1% while the NASDAQ was down 4.6% through end of April.
Charles Biderman of Trim Tabs, whose firm follows market liquidity, states that since the end of 2011, $2 Trillion of U.S. stocks have been bought by corporations on a net basis.
Individuals via ETF's and Mutual funds have been net sellers.
In 2016 Basic materials, Energy and Utility stocks have led with YTD returns of 10.2%, 13.4% and 12.8%. These were among the worst performing sectors last year.
Healthcare and Technology led the losers down 3% and 3.7% YTD having been among the top sectors last year.
The SPX sells at nearly 18x consensus estimates with a 2.2% dividend yield while the 10 year U.S. Treasury note yields 1.86%.
10 year German Bunds yield 0.26%, Japan 10 year notes pay -0.13%.
Investors like Warren Buffett are still wrapping their minds around negative interest rates and don't seem to like what it implies, i.e no growth and no yield.
Consequentially, U.S. corporations with over $2T held overseas are hoarding cash. The personal savings rate in the U.S. Is 5.4% now, higher than the official unemployment rate of 5%.
Many top quality companies borrow money, buy back their own shares, shrink their float and create cash flow in the process. Debt is tax deductible and dividend rates are set higher than the cost of capital.
Exxon's stock yields 3.4%. Exxon lost it's AAA bond rating not long ago, but raised it's quarterly dividend to 75 cents per quarter on April 27.
Unilever borrowed 750 million Euros for 7 years at a 0.5% yield on Jan 26th, they also borrowed 300 million euros at a yield of 0.08% with a zero coupon.
It has been only 4 times over the past 50 years that stock dividends are higher than the yield on the 10 year treasury note. That situation arose again in January 12, 2015.
S&P 500 percentage (%) performance after first day the dividend yield goes above the 10-year Treasury yield
Date One month Three months Six months One year
June 22, 1962 7.8 9.5 18.9 33.4
Nov. 19, 2008 10.1 -3.4 12.6 35.7
Aug. 10, 2011 3.0 10.6 19.8 25.4
Average performance 6.97 5.57 17.1 31.5
While the world is not completely irrational, we continue to be in a period where things seem amiss. On Jan 12, 2015 the SPX was about 2044, it has a value of 2088 today only 2% higher with the 2.2% dividend yield. One can argue things are a bit different this time. Performance has been carried forward by central bank policies.
U.S. First Quarter GDP rose by +0.5%, down from 1.4% compared to last year's Q1.
China GDP, stocks and oil prices came back strongly from the February lows.
We have rallied to just short of the May 2015 SPX high of 2134 in late April.
Wage and salary growth are both down so far in 2016, but consumer spending while soft is steady. Economists see no recession this year. The FED may raise rates once more but even that assumption is questionable given the upcoming elections.
The Presidential race is interesting but remains very unpredictable.
With 62% of the SPX having reported earnings for the 1st Q 2016, 74% of companies have bettered the mean estimate with 55% reporting sales greater than the mean estimate. The problem is estimates were dropped numerous times before the actual reports.
According to FACTSET we are experiencing an earnings decline of -7.6%. For the first time since Q4-2008 through Q3-2009 we are seeing four consecutive quarters of decline, the definition of an earnings recession.
The SPX forward P/E ratio is now 16.8x, above the 5 & 10 year averages.
In sum, with rates low, stocks are being held up not by earnings growth, but by lofty P/Es thanks to Central Bank policies and share buybacks.
While many are not feeling the “Bern”, 6 of 10 Democratic primary voters believe socialism has a "positive impact" on society.
Socialism prevailing over Capitalism among voters in every demographic does not sound bullish.
The public is down on business and politics but life goes on.
Doug Coppola
John Coppola
May 3, 2016
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