Top 5 Quality Stocks To Own For 2015
This week’s big news in the financial markets is the collapse of bond yields amid concerns about growth and deflation here and particularly in Europe.
As 2014 started, long-term interest rates were widely expected to keep climbing from their early 2013 lows. But rates have fallen because anticipated faster economic growth hasn’t come to pass and inflation remains very low, even after several years of monetary stimulus.
Global bond rates dropped to their lowest levels of the year this week. The yield on the 10-year US Treasury issue tumbled to below 2.5 percent, a six-month bottom. The yield started the year at 3 percent. In Germany, the yield decline has been even sharper, with the 10-year bund in a freefall from 1.9 percent to 1.3 percent, the lowest in a year. The depressed yields in Germany, Japan (0.6 percent for the 10-year issue) and other nations serve to increase investor demand for higher-yield Treasury securities.
Despite bond markets’ pessimistic messages about growth and deflation, stocks reflect optimism. True, they fell sharply yesterday. But the Standard & Poor’s 500 touched 1900, yet another all-time high, this week. And the Stoxx Europe 600, the benchmark European stock index, reached a six-year peak.
Yesterday, we heard that the euro zone’s economy grew 0.2 percent in the first quarter. While it was the fourth straight quarter of expansion, it was just half the 0.4 percent growth that was expected. That 0.2 percent translates to an annualized 0.8 percent.
Germany grew a solid 0.8 percent from the previous quarter, its best performance in three years. Spain grew 0.4 percent. But France’s economy was flat, Italy’s contracted 0.1 percent and the Netherlands posted a sharp 1.4 percent drop.
I! n addition, euro zone inflation, at an annual 0.7 percent, remains far below the European Central Bank’s target rate of 1.95 percent. And unemployment, at 11.8 percent, is only slightly below the 12 percent peak of a year ago.
As you may recall, growth in the U.S. economy fared even worse in this year’s first three months, inching ahead at a 0.1 percent annual rate. The weakness was blamed primarily on bad weather and weak export numbers.
Our economy is supposed to improve in the current quarter. This week brought more evidence of improvement in the job market and somewhat higher inflation, but also weakness in retail sales and housing. Time will tell.
You may also remember the popular theory that the extremely aggressive monetary policies of the Federal Reserve and other central banks would inevitably lead to soaring inflation, sky-high bond yields and the collapse of the dollar. None of these have occurred, although the greenback is hardly robust.
“Lowflation,” as it’s often called in Europe, makes it harder to repay debt, of which there’s an abundance there (and here). Paradoxically, it’s a reason for the strength of the euro currency, which makes European exporters less competitive in the global economy because it increases their costs. And stagnant or falling prices tend to cause people to hoard cash and reduce spending.
Despite Europe’s woes, Mario Draghi, the president of the European Central Bank, seems willing to rely primarily on talk instead of action. His point of view may be understandable. After all, his now-famous July 2012 pledge to do “whatever it takes” to save the euro has been credited with reversing the downward spiral of Europe’s debt crisis without the ECB having to take aggressive action.
“The governing council is comfortable with acting next time,” Draghi said last week, after the ECB’s decision to do nothing. The ECB is scheduled to meet again in June. &! #8220;Bef! ore, we want to see the staff projections that will come out in early June,” Draghi added.
But the decision to not act now isn’t a positive development when it’s clear that growth and inflation are unacceptably low. It’s hard to see how the “staff projections” could be much better than the recent numbers.
Even Germany’s central bank, which long has resisted further stimulus, is now willing to support new ECB measures, reports say.
Unlike in 2012, when tough talk was enough, Draghi will have to take action in June or lose his credibility and risk a market meltdown. Naturally, the prospect that the ECB will have to act in June is another reason for investors to buy bonds.
ECB actions could take various forms. One is quantitative easing, which is to buy bonds or other assets as a way to pump euros into the financial system. Another is to start charging banks to leave money at the central bank, which theoretically would give them greater incentive to lend the money out instead.
Expansionary monetary policies typically weaken a currency by adding more money to the economy. The ECB wants a weaker euro. Before Draghi’s comments last week, the euro hit $1.3995 vs. the dollar, its highest level since October 2011. The euro has weakened since then.
With today’s low government bond yields, common stocks, master limited partnerships, real estate investment trusts and preferred stocks are increasingly attractive.
Currently, some 150 stocks in the S&P 500 carry yields that are higher than the 10-year Treasury issue’s 2.5 percent. Most of the companies will boost their payouts and generate rising earnings over time. A bond cannot do that.
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