AN ALTERNATIVE TO MONEY MARKET FUNDS07 Dec 2016, Posted by News in
November is behind us and investors are celebrating Donald Trump’s Presidential election with an enormous rally. The Dow Jones Industrial Average, S&P 500 and Nasdaq have all reached record levels since Trump’s victory on November 8. The biggest beneficiaries in this rally have been the cyclical, mining, materials and energy sectors.
The yield on the 10 Year US Treasury has climbed more than 100 basis points since hitting its all time low of 1.35% after the Brexit vote in June. The Federal Reserve is widely expected to raise rates by 25 basis points when it meets December 13-14, and perhaps a few times in 2017 as well. Nevertheless, the yield on the 10 Year US Treasury remains quite low based on historical terms. Keep in mind that Mr. Trump made clear during the campaign he would not nominate Janet Yellen for a second term to Chair the Federal Reserve. Thus, she is set to depart in February of 2018.
The spike in US interest rates has led to a widening of the spread between the 10 Year German Bund and the 10 Year US Treasury. The spread had been hovering around 165-175 basis points prior to the Presidential election. Since then the spread reached a record level of more than 200 basis points. In late November, Mario Draghi made clear the European Central Bank will continue its current monetary policy with interest rates remaining extremely low. The Eurozone economy continues to experience weakness and high unemployment.
At some point, this spread will have to reverse. The strengthening US Dollar will likely create more difficulty for US firms with a significant amount of revenue generated overseas. Goods produced in the US to be sold as exports will be more expensive in Europe and Asia than goods produced by manufacturers in these regions, putting US manufacturers at a disadvantage. The Euro traded below the $1.06 level while the Japanese Yen weakened as well. Clearly, this is an issue the Trump administration will need to address promptly after taking office in January.
Interest rate sensitive sectors such as the Utilities, Telecom and Consumer Staples have suffered share price declines since Trump’s election. These declines may prove to be a buying opportunity. Several of these stocks, such as AT&T, Verizon, Southern Co. and Duke Energy continue to offer dividend yields in excess of 4% and also have a history of raising their dividends. The strong US Dollar and the wide yield spread that exists between US Treasuries and the sovereign debt of other G7 nations could limit the rise in US Treasury yields over the next year.
My weekly radio show on WWPR 1490 AM airs at 12.30pm each Friday. The show can also be heard live on the station’s website (www.1490wwpr.com). My prior radio shows and news columns are available on my firm’s website (www.amescapmgmt.com).
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