Dividends tell the true story about Bernanke’s unsustainably high stock marketsPosted on 06 March 2013 with 1 comment from readers
Forcing interest rates lower by every artifice known to central bankers is the main factor behind the all-time high reached in the Dow Jones Index yesterday. But this is not an indefinitely sustainable force to push the market still higher.
US treasuries have been yielding two per cent for most of the past year. The Dow’s payout to shareholders is 2.5 per cent, the broader S&P 500 a miserable 2.15 per cent. Would you put your money at risk in a private company for that kind of return?
Stock dividends have tracked lower and lower as investors sought the previously higher returns of equities. That day is almost up. If you can’t get more return from stocks than bonds then why buy them?
This month marks the end of the fourth year of this stock market rally. It’s been amazingly quick return to the previous all-time high by comparison to past recoveries, particulary when the real economy shows few signs of recovery. Car sales are still running lower than before the crash and the housing market is barely off the bottom.
True S&P company operating margins stand at around 20 per cent, the highest level on record. Mr. Bernanke’s low cost borrowing has helped to boost company profits too. But this is a fool’s paradise.
The problem with outstanding profit margins that have benefited from draconian lay-offs and low interest rates is that these cannot be relied upon indefinitely. Profit margins move in a cycle and the next stage is increased competition due to reduced demand. That’s what WalMart signalled in its latest trading statement.
Demand is falling at the bottom end of the US economy. The number of people dependent on food stamps has doubled to 46 million since President Obama took office. The unemployment rate of 7.8 per cent just does not show this picture correctly, most of the poor can’t even qualify as unemployed.
If profit margins are topping out and few analysts on Wall Street see much room for improvement now, then stock market prices will fall from here, albeit the momentum might bring in a few late buyers, the mugs who always buy at the top.
Bears are supposed to throw in the towel at this point, capitulate and buy. But it is too late to do what you should have done four years ago. Establishing short positions for the move downwards would be a better idea.
The stock market has ignored some pretty important negatives recently. The US is slashing public spending, taxes are going up, the eurozone is back in crisis, Chinese growth looks far from assured and oil prices are still high, whatever the future hopes of shale gas. Stock market investors just smile and look the other way.
Some see that as a sign of investor confidence. Others might see it as a sign of outstanding stupidity.