I have a few observations and notes to share this week.
The first is the streak of winning Tuesdays. Until two days ago, the Dow Jones industrial average rose on 20 consecutive Tuesdays. According to Bespoke Investment Group, this was the longest such streak since at least 1900. It may be the longest such streak ever.
The streak was obviously a random event. I did not hear of anybody, professional or individual, who was making decisions based on it. But, it is human nature to find identifiable patterns in what is otherwise a series of random events. Combine this behavior with the temptation to expect current events to continue into the future and a recipe for disaster is formed. Streaks do occur (e.g., a roulette ball landing on black several times in a row), but that does not make them repeatable events.
Another streak that appears to be ending, or at least weakening, is the year's upward run by traditionally higher dividend-paying stocks. Many utility, telecom and even consumer staple stocks, plus REITs and MLPs, lagged in May on fears about rising interest rates. Junk bonds fell too. You can call up a chart on many such stocks -including AT&T (T), Wisconsin Energy (WEC) and Enterprise Product Partners (EPD) - and see a decline in prices starting on May 21 or May 22.
Behind the move is an increase in bond yields. Yields on the benchmark 10-year Treasury have risen above 2.1% on concerns the Federal Reserve will either cut back or end its bond purchases. Not mentioned in any of the commentary about the recent increase in rates is that nearly every prediction about when the Federal Reserve will reverse course on its monetary stimulus and raise its target rate has been wrong. There is also little mention that current yields are still very low. Relative to a month or two ago they may seem high, but that's only because so many people have anchored the expectations for where the benchmark Treasury note should trade at around 1.6% or 1.7%.
Also potentially contributing to the recent pause in the stock's market rally are prevailing valuations. My colleagues and I are having more difficulty finding good quality stocks with valuations below their historical averages. It's not that stocks are expensive, but rather that an increasing number look to be fairly valued.
It's not just large- and mid-cap stocks either. The Stock Investor Pro Shadow Stock Portfolio screen only identified 10 stocks this week, a low number. This implies that there are comparatively few bargains among small companies. (Our Model Shadow Stock Portfolio has a maximum market capitalization limit of $240 million for buys.) Again, it doesn't mean stocks are expensive, only that they aren't cheap anymore.
This is something those of you who are thirsty for yields should consider: The current yield of the S&P 500 index is 2.26% (more than 80% of its members now pay dividends) and the broader Russell 3,000 index yields 2.02%. Any dividend yield above 3.5% should raise questions about why it is so comparatively high. A comparatively high yield is a sign of perceived risks; investors are demanding extra compensation. Though some attractive high-yielding stocks may be out there, tread carefully.
Speaking of yields, the Securities and Exchange Commission voted unanimously on Wednesday to propose two money market reform rules. The first would require prime money market funds to transact at floating net asset value. Share prices would be priced out to four decimal points. Government and retail money market funds (defined as limiting shareholder redemptions to a maximum of $1 million in transactions per business day) would be exempt. The second would set in place liquidity fees during times of stress. Details on both proposals can be found on the SEC's website.
Additional disclosure: Both AT&T and WEC are held in the AAII Dividend Investing portfolio.