Defensive Buying
Individuals have added shares in companies whose earnings are least reliant on economic growth to make up for declining bond yields. The average dividend payout on defensive stocks in the S&P 500 is 2.7 percent, compared with 1.8 percent for so- called cyclical shares, according to data compiled by Bloomberg. That compares with rates on 10-year U.S. government notes of 1.63 percent.
Investors are collecting less on government bonds from the U.S. to Germany and the U.K., which are near negative returns after accounting for inflation. So-called real yields on 10-year Treasuries are about 0.15 percent. Similar measures are negative 0.03 percent in Germany and negative 1.17 percent in the U.K.
“There’s a lust for yield that exists around the world, both from institutions and individuals,” John Stoltzfus, chief equity strategist at New York-based Oppenheimer & Co., said in a May 2 phone interview. “If they can’t get it in bonds, where do they go? It’s moving to equities, and the first place is those proxies for fixed income: telecom, utilities, large-cap pharma.”
Consumer, Technology
While defensive stocks led this year, industries with earnings tied to the economy have generated the biggest returns since March 2009. Consumer discretionary shares are up 250 percent, followed by banks at 203 percent, industrial companies at 175 percent and technology suppliers at 136 percent. Phone companies have the smallest return at 88 percent, while power producers gained 89 percent.
At 18.8 times annual profits, defensive industries are trading at a 19 percent valuation premium to the market, according to data compiled by Bloomberg and Morgan Stanley. Shares of defensive companies have returned the least in every bull market since at least 1990, according to data compiled by Bloomberg and Birinyi Associates Inc. in Westport, Connecticut.
“Contrarian investing may be another way of saying that valuations matter,” Stephen Wood, who helps manage about $163 billion as the New York-based chief market strategist for North America at Russell Investments, said by telephone on May 3. “Right now peace of mind has gotten very expensive.”