You can always be certain that we are living in uncertain times,
which is why the old Wall Street adage about markets not liking
uncertainty is so devoid of content. It was not even
four months ago
that I could analyze which industry groups' behavior diverged the
most and least from the broad market's behavior as a function of
excess global liquidity.
Now the question has to be which industry groups have been hurt the
most and the least by the sudden rise in long-term interest rates.
As an aside, this shift and the concomitant bearish steepening of
the yield curve were visible back in
; had it not been for developments such as the bungled Cypriot
bailout in March -- remember that? -- and Japan's expansion of QE
in April, we would have been at our present bond sell-off earlier.
Hurt by Higher Yields
Let's compare return streams for 144 industry groups in the S&P
1500 Supercomposite across two periods. The first period will be
from the November 14, 2012 downside breakout in the yen and the
beginning of our own post-election rally through May 2, 2013. The
second period will extend from the first upside breakout in
ten-year Treasury yields through the release of the FOMC June
minutes last week.
A total of 21 groups' returns changed at a 90%+ confidence
interval; all of these changes were from higher returns to lower
returns. The list is dominated by REITs, utilities, and a host of
consumer staples, such as personal products, tobacco, and soft
drink companies; unsurprisingly, the homebuilders are on this list,
too. If these groups sound like a who's who of winners from the
November 2012 - April 2013 period, a time when supposedly defensive
issues were leading the market, it is because they are. The REITs
include some well-recognized names like
Simon Property Group
Plum Creek Timber
(AMT). The consumer staples list is populated by firms such as
Unfazed by Higher Yields
A total of 14 groups' returns were unchanged at a 90%+ confidence
level. Unlike the list above, these have no strong connecting
theme. In only two of the cases -- household appliances and leisure
facilities -- did returns decrease after May 2, 2013 from the
November 2012 - May 2013 period. These two groups include firms
Life Time Fitness
(WHR). I guess if you're determined to shoulder press a
refrigerator while running around a racetrack, higher Treasury
yields are not going to stop you.
The pattern from earlier in the year -- having supposedly defensive
stocks leading the way higher as investors chased yield -- was not
sustainable; at some point, dividend yields had to approach an
arbitrage bound with both corporate and government bonds. Growth,
or the embedded call option on earnings, is a much more sustainable
path to higher equity returns.
As firms availed themselves of the opportunity to issue debt during
the period of artificially low rates, and as corporate balance
sheets still show a large amount of cash, higher yields will be
less damaging to corporate profitability than they might have been
at an earlier time. The real question is whether governments will
be able to function with their high debt loads after a decade of
incontinent spending habits once the Federal Reserve stops
monetizing their debts.