Bond yields surged last week, putting some dividend-rich stocks (utilities, REITs) in a very vulnerable position. Could this be the end of their rally?
Equities rose last week as the U.S. played a bit of catch-up with international markets. A particularly strong U.S. jobs report confirmed the economy continues to improve, but also demonstrated that some areas of the stock market, such as utilities and real estate investment trusts (or REITs), are much more vulnerable to an increase in interest rates. Bonds sold off throughout the week, and a rise in yields could put an end to the rally in dividend-yielding stocks.
Market Realist – Stocks have advanced for two consecutive weeks as global cues and the strong jobs report buoyed equity markets this month. US equity markets rose last week on improving global cues as investor sentiment was bolstered by some positive earnings reports and the Ukraine cease-fire. Though Greece debt continues to remain a concern, investors are hopeful of a resolution soon.
Market Realist – The US economy continues to show signs of strength as depicted by the strong jobs report. The US economy added 275,000 jobs in January while estimates for November and December were revised upwards to 423,000 and 329,000, respectively, as the above graph shows. Addition to non-farm payrolls has now stayed above 200,000 for 12 consecutive months.
Market Realist – The average hourly earnings have also come in at 24.75, an increase of 0.5%, which has been the best showing since November 2008. This can be seen in the previous graph. Average weekly earnings too grew by 0.5% while average hourly wages rose from $10.39 to $10.40 in January.
Market Realist – Stocks have been outperforming bonds in 2015. The S&P 500 (SPY) (IVV) rose 1.99% to 2,096 in the week ended February 13, 2015. The Dow Jones Industrial Average (DIA) rose 1.1% to end the week at 18,109. The NASDAQ (QQQ) rose 3.1% to 4,893, its highest level since 2000. On the other hand, yields continued to rise on the 10-year Treasury (IEF) (TLT), climbing from 1.95% to 2.06%, as prices fell. The previous graph shows how the yield curve has shifted upwards over the past two weeks.
Read on to the next part of the series to understand how even though mergers and acquisitions are providing impetus to stock markets, headwinds still persist.