Trump economics could be hazardous to bonds and dividend stocks

Trump’s stunning victory for the White House may mark the long-awaited end to the more than 30-year-old Bull Run in bonds, as bets on faster U.S. growth and inflation led investors to favor stocks over bonds.

There has been a sentiment shift in the bond market. The stampede from bonds propelled longer-dated U.S. yields to their highest levels since January with the 30-year yield posting its biggest weekly increase since January 2009. The 10-year German Bund yield rose to its highest level in eight months, while the 10-year British gilt yield climbed to its highest level prior to Britain’s decision to leave the European Union on June 23, known as Brexit.

“I’m the king of debt. I’m great with debt. Nobody knows debt better than me,” Trump told Norah O’Donnell in an interview that aired on “CBS” “I’ve made a fortune by using debt, and if things don’t work out I renegotiate the debt. I mean, that’s a smart thing, not a stupid thing.”

Global bond markets worldwide have already lost more than 1 trillion dollars.  Speculation is that Trump’s tax cuts and stimulus spending could increase the national debt by trillions of dollars. The chart below is the iShares 7-10 Year Treasury Bond (IEF)

bonds-10-7

 

TIPS appeal

While investors dumped most types of bonds after Trump’s victory, they piled into Treasury Inflation-Protected Securities as a hedge against a pick-up in inflation. Investors poured $1 billion into TIPS in the week ended Nov. 9, the second-biggest inflows since records began in October 2002, data from Thomson Reuters’ Lipper service showed on Thursday.

Higher bond yields could have a negative effect on dividend stocks

Bonds have historically enjoyed a lower risk premium than dividend stocks. Higher bond yields could attract investors away from owning dividend stocks. Consumer staples and utility stocks have already fallen based on the Fed raising interest rates in December. Some experts believe that the Federal Reserve will be forced to increase rates even more in 2017.

The good news is that this could be just a knee jerk reaction to the shocking election results. In a subtle effort to lessen fears, President Obama suggested Monday that the office of the president has a way of opening one’s eyes to the realities of governing and decision making.

“Regardless of what experience or assumptions he brought to the office, this office has a way of waking you up,” Obama said.

“My advice, as I said to the President-elect, was that campaigning is different from governing,” Obama said Monday. I think he recognizes that I think he’s sincere in wanting to be a successful president. I think he’s going to try as best he can to make sure that he delivers not only for people who voted for him but the people at large.”

It remains unclear how Trump’s promises translate into policy and the degree to which they would affect the economy. So far, the rally in U.S. stock markets suggest whatever Trump may do with the help of a Republican-controlled Congress would give a lift to the U.S. economy, which is growing at about 2 percent this year.

cautionHigher interest rates could cause a U.S. recession!

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2 thoughts on “Trump economics could be hazardous to bonds and dividend stocks

  1. Even without Trump, bonds are in bad shape.

    If interest rates stay this low, bonds will continue to produce poor returns that barely keep up with inflation and continue offer a really subpar risk/reward profile. On the other hand, if interest rates rise, bond prices will be negatively impacted in the short term.

    As far as dividend stocks, I’m mainly concerned about the high CAPE ratio (up to 28 now) of the S&P 500 and how this high valuation is keeping dividend yields low and share buybacks less effective.

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    • Thanks Lyn for your comments. I agree with you. The problem is investors have never experience a bear market in bonds. Plus they still believe that bonds are safer than owning stocks. It blows my mind that Target date mutual funds in 401Ks are still growing in popularity.

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