Perhaps ironically, rate-sensitive stock segments (e.g., utilities, REITs, high yielding dividend stocks, etc.) as well as rate-sensitive bond assets (e..g, high-yield bonds, long-term Treasuries, etc.) have performed tremendously year-to-date – with one exception. Homebuilder shares are no longer rising and falling in sync with interest rate trends.
| Rate-Sensitive Stock And Bond Success, Excluding The Homebuilders | ||||||
| YTD % | ||||||
| Vanguard REIT (VNQ) | 22.7% | |||||
| Vanguard Utilities (VPU) | 19.4% | |||||
| Vanguard High Dividend Yield (VYM) | 9.6% | |||||
| PIMCO 20+Year Zero Coupon (ZROZ) | 32.0% | |||||
| iShares Barclays 10-20 Year (TLH) | 11.3% | |||||
| iShares High Yield Corporate Bond (HYG) | 3.9% | |||||
| iShares DJ Home Construction (ITB) | -2.7% | |||||
| PowerShares Dyn Building & Construction (PKB) | -5.6% | |||||
| SPDR S&P Homebuilders (XHB) | -7.1% | |||||
There are other ways to look at the long-term woes for housing. In May of 2013, the Federal Reserve first hinted that it would taper its policy of buying bonds to push rates lower. That policy shift sent the 10-year yield from approximately 1.5% all the way up to 3.0%, and caused rate-sensitive assets of all stripes to underachieve in the 2nd half of 2013. Homebuilders were no exception, as the SPDR S&P Homebuilder (XHB):S&P 500 price ratio confirmed the relative weakness.
Then a funny thing happened in 2014. Against all economist projections – when only a handful of financial professionals had suggested interest rates would fall, not rise – interest rates slipped significantly. The 75 basis point drop in the 10-year has been a boon to dividend yielders, utilities, REITs, bonds and a variety of rate sensitive assets. All except one — home construction corporations. As the acceleration of the relative weakness in the XHB:S&P 500 price ratio demonstrates, housing uncertainty trumps rate favorability.
As long as the U.S. experiences the duel threat of deceleration in gross world product (GWP) and housing uncertainty, I am committed to the barbell approach that I have talked about throughout the entire year. On the right side of the barbell, I may continue to acquire lower risk equity assets during setbacks – ETFs such as iShares S&P 100 (OEF) and iShares USA Minimum Volatility (USMV). On the left side of the barbell, I may continue to accumulate longer-term bond assets on sell-offs like Vanguard Long-Term Bond (BLV) and Vanguard Extended Duration (EDV). I am less interested in assets in the middle of the risk curve – assets such as convertibles, preferreds and REITs. That is not an indictment of those asset classes in the middle; rather, it is endorsement of the barbell – a time-honored, late-stage bull market allocation.