Despite worries regarding the U.S.-China trade war and inverted yield curves, equities have been fairly resilient during these volatile times. However, things could get worse moving forward and according to one analyst, it’s better to accept the current low yields rather than a potential 50% stock market crash.
The latest manufacturing data from the Institute of Supply Management (ISM) are reflecting a potential economic slowdown, which could further fuel a flight to bonds and thus, cause yields to fall lower as bond prices head skyward.
President of Bianco Research, James Bianco says investors should opt for the lower yields when considering the stock market crash alternative. When compared to other countries, the long-term 30-year Treasury note is one of the few developed countries left that are yielding over 2%.
“That is a high yield, that’s what you dream for,” Bianco told MarketWatch in an interview. “The 30-year bond is up 22% this year, it’s well ahead of the S&P. Especially if you look at negative yields in Europe, this has been one of the best years in history to own fixed-income securities, especially investment grade from a return perspective.”
“I don’t think the world can handle high rates anymore,” Bianco added. “What we showed was we went to 3.25% for a couple of weeks and the U.S. stock market broke. I don’t think there’s any way we can get to 4% or 5%, without this creating a lot of damage.”
Downward Pressure on Treasury Yields
As investors continue to swallow up bonds faster than a thirsty camel in the desert sun, it’s been putting downward pressure Treasury yields amid the scramble for safe-haven assets. However, one way to combat negative yields is by adding more dividend-yielding equities via exchange-traded funds (ETFs).
One ETF to consider is the FlexShares Quality Dividend Dynamic Index Fund (NYSEArca: QDYN). QDYN’s underlying index targets management efficiency or quantitative evaluation of a firm’s deployment of capital and its financing decisions. By using a management efficiency screen, the index can screen out firms that aggressively pursue capital expenditures and additional financing, which typically lose flexibility in both advantageous and challenging partitions of the market cycle.
Another option is the ProShares S&P 500 Aristocrats ETF (CBOE: NOBL), which should be an area of emphasis for income investors. NOBL tracks the S&P 500 Dividend Aristocrats Index, targets the cream of the crop, only selecting components that have increased their dividends for at least 25 consecutive years. Consequently, investors are left with a portfolio of high-quality, sustainable dividend payers.
For more market trends, visit ETF Trends.