Bernanke Brings Back the Income Trade
Bernanke's dovish comments are most benefiting emerging markets and dividends. Unusual mix? Yes. Tradable? Very.
-- Jimmy Fallon
Bernanke's dovish comments yesterday have ushered in a new rush of Nouveaux Bulls and made Gray-Haired Bears go bald waiting for a correction. The Fed's confuse-and-conquer strategy, which has been a theme of mine over the past several months, has caused some tectonic shifts in asset allocation, with long-duration bonds dumped and many notable fixed income funds seeing significant withdrawals. Of course, nothing has changed. Deflation pressures remain high, which is something that Bernanke himself alluded to by arguing that in some ways, the Fed should be "more accomodative."
I suspect the income trade will, for a short while, catch a bid. Generally, people favor dividends and coupons when expectations for falling interest rates are rising, alongside deflation fears. Take a look below at the price ratio of the SPDR S&P Dividend Index ETF (NYSEARCA:SDY) relative to the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/SDY is outperforming (up more/down less) the denominator/SPY.
Note that despite the bond market sell-off in June, dividend stocks have actually held up relatively nicely against the S&P 500 and appear to be trying to stage a comeback. By stressing that rates will be low into the foreseeable future, the appeal of dividend plays may be rising once again, just as everyone has written them off in favor of cyclicals. For a trade, it seems plausible that this will continue in the very short term.
My firm's ATAC (Accelerated Time and Capital) models used for managing our mutual fund and separate accounts are close to a rotation back into equities, with emerging markets likely where our allocations would shift, given how severely they have underperformed and recently improving relative momentum. This could occur alongside a move back into dividend stocks in the US as overseas markets bounce and outperform. Either way, Bernanke once again has proven that words alone can move markets.
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