The rally in Dow Jones stocks after President Trump was elected is the largest ever according to data compiled by the Wall Street Journal. However, given the sectors that have been rallying the most, and considering signals from the bond market, we believe now is an attractive time to own dividend stocks.
And in some regards that rally has continued through the first quarter of 2017 as many of the typical economic expansion sectors (such as industrial and materials) as well as higher risk sectors (such as technology stocks, small caps and emerging markets) continued to lead the way higher since the election.
Also, the spread on risky high yield bonds (versus safe haven treasuries) has come way down over the last year, which means investors are less afraid of market risks.
However, stock market investors may be able to learn something from the investment grade bonds market. For example, the rally we saw in treasury yields after the election is reversing which means bond market investors are starting to show increasing caution with regards to the economy.
Further, high credit quality companies have been issuing bonds at a record pace this year, an indication that the bond market may not be as convinced as the stock market that the “Trump Rally” is going to continue.
Importantly, corporate earnings season begins to ramp up over the coming weeks, and we’ll see if companies can back up the stronger earnings that many investors have been expecting. GDP has been strong, but without strong earnings reports, Treasury yields could fall further, and the Trump Rally in stocks could also quickly fade away.
In particular, dividend stocks have underperformed the market this year as measured by the S&P Dividend ETF (SDY) versus the dow jones as shown in the following chart.
In our view, this bodes well for dividend stocks in two ways. First, simply from a contrarian mean-reversion standpoint, we believe it’s better to buy low. And secondly, if the Trump Rally starts to fade, investors will seek more safe-haven stocks (i.e. dividend stocks) as they’ve already started to do in the bond market. And even if the Trump rally rages on, dividend stocks will also rise from here because a rising tide raises all ships. For your reference, our current dividend stock holdings are available here.