Thursday August 19

Stocks rise slightly as the dollar continues to slide in response to the FOMC minutes release. The S&P 500 rose 0.2% to 2,187 and the Dow Jones rose 0.1% to 18,597. Utilities continued to outperform as a result of decrease rate hike expectations, and bank shares were for the most part unchanged. Economic data showed that jobless claims remain low indicating continued strength in the labor market. Also contributing to optimism was oil prices, which continued their recent gains. WTI rose 3.2% to $48.29 and Brent rose 2.1% to $50.87 as both grades of oil entered a bull market. The dollar weakened across the board as investors expect that the Fed will wait longer before raising rates. EUR rose 0.6% against USD to $1.1356. JPY rose 0.3% against USD to Y99.94. GBP rose 1% against USD to $1.3171 after retail sales showed that the Brexit did not have much of an impact on consumer spending. Retail sales in the UK rose 1.4% last month compared to estimates which called for a 0.2% gain. Treasury yields continued to fall as the 10 year lost 1bp to 1.54% and the 2 year fell 2bp to 0.71%. The spread between 10s and 2s is at 0.82%.

Dividend payouts for S&P 500 companies have been on the rise, which is a reflection of the global search for yield reaching the equity markets. The payout ratio for S&P 5500 companies (proportion of net income paid as dividends) is currently at 37.93% which is just shy of the all-time record of 38.16%. Investors have demanded higher dividend payouts as a result of falling yield income in fixed income markets. This comes as the yield on the BAML AAA corporate bond index is just slightly over 2%, so investors are looking for yield from alternative sources. Over the last 5+ years as bond yields have fallen, an index of companies that includes companies that have paid dividends for 25 straight years has outperformed the broader market by a significant margin. While stock buybacks have at times been the more favorable method of returning money to shareholders, investors right now want a substitute for fixed income assets which makes dividends attractive. In 2Q 44 S&P 500 companies paid a dividend of more than 100% of their net income. Payout ratios in Europe are even higher at nearly 59% for the Stoxx 600 and 70% for the FTSE 100.

The ECB minutes suggested that the central bank is open for further monetary easing in September. The minutes for the July 21 meeting said that the governing council would closely monitor the developments in the global economy especially as it relates to the UK’s decision to leave the EU. Investors are hoping that this could result in an extension of the e80bn a month QE program. Additionally it is expected that the ECB may expand the scope of the bonds it is able to buy to help reduce some of the illiquidity and scarcity issues that have caused some concerns in the past. Just as in the US, inflation is a source of concern and has showed no credible signs of upward pressure. Currently inflation is expected to be just 0.2% this year, 1.3% in 2017, and 1.6% in 2018.

Bill Gross has a pessimistic view on the effects of monetary easing on the global economy. Gross says that the scale of monetary easing puts the global economy at risk. Traditionally the view is that lower bond yields result in higher equity prices, higher bond prices, lower consumer interest rates, and as a result increased consumer spending which results in growth as individuals and businesses invest in homes and other projects. However Gross argues that low and negative interest rates may be damaging the economy as productivity growth has dropped off in many developed countries. In the US y/y productivity growth is in fact negative. Instead of using low interest rates to finance investment (which drives productivity), companies are using low rates to finance stock buybacks and dividends. Demographic trends, aging populations, and the anti-globalization trend may be limiting businesses interest in investing. Lastly, Gross says that if insurance companies and pension funds are not able to meet their obligations (as a result of low yields)then that could result in higher insurance premiums, reduced pension benefits, and more problems for consumers and businesses that could result in additional stagnation.

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Thursday August 19

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