as part of
At times when faced with stressed financial conditions, it is
helpful to look through history for periods that bear similarities
to the current environment. Obviously no two periods are ever the
same, but the period of mid 40s to early 50s in some ways resembles
markets of today.
Throughout WW-II and for some time after, the Fed conducted what
could amount to QE by capping treasury yields. It allowed the US
Treasury to finance the war effort at historically low rates by
continually purchasing treasury securities. As an example, below is
an excerpt from the FOMC minutes of February 29, 1944.
In the mid 40s the stock market had a fairly sharp correction after
a strong rally, as the war-based industries had to shift focus
toward the private sector (the familiar shift from government
stimulus toward reliance on the private sector). From that point on
the market did not materially appreciate until the early 50s.
As expected it was the high dividend stocks that outperformed
during that period. The chart below from Barclays Capital shows the
relative performance of high to low dividend stocks.
The outperformance lasted for some five years through the stress
period. In 1951 the Treasury-Fed Accord eliminated the Fed's
obligation to the US Treasury to purchase its securities at a fixed
rate (which was forcing the Fed to grow balance sheet
indefinitely.) This event began the normalization of the Fed's
monetary policy and ended the outperformance of high dividend
The chart below compares the Vanguard High Dividend ETF (
) with the overall market (
). Over the past year, VYM has outperformed SPY by close to 7%.
Based on the similarities between the post WW-II period and now,
this high dividend stock outperformance should continue until the
Fed ends the period of easy monetary policy. And from all the
indications we have, the Fed's extraordinary accommodation should
be in place for some time to come.