By Maira Thompson, Clark Capital Senior Portfolio Manager
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One of the biggest contributors to market performance this year continues to be historically low interest rates. The result has been positioning across fixed income markets and equity sectors in an effort to benefit from the current environment.
In the first half of 2016, the “bond proxy” sectors such as Telecom and Utilities dramatically outperformed the S&P 500 Index until the 10-year Treasury hit a low of 1.36% in July. Since the July 8th low, the subsequent rise in yields combined with Federal Reserve comments about a possible December rate hike propelled investors out of bond proxy sectors into more growth-oriented sectors such as Technology.
Historically “dividend growth” companies demonstrating earnings growth, strong free cash flow and rising dividends have been resilient in a rising interest rate scenario. Numerous studies point to the last eight Fed fund hikes where “dividend growers” experience strong performance compared to dividend non-payers, cutters and companies that don’t consistently increase their dividend. See chart below.
The U.S. bull market continues to forge ahead looking beyond the negative S&P 500 earnings projection for this quarter of -1.1% which would be the sixth negative quarter in a row. In the fourth quarter, we believe greater stability in the dollar and oil prices should help corporate earnings beat lowered expectations. This quarter we noted a slower pace of several shareholder friendly policies such as share buybacks and dividend growth rates. Despite the shift away from share buybacks, the Materials, Industrials, Financials, Technology and Energy sectors are projected* to accelerate their dividend growth along with stronger growth prospects with improving revenues.
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As the search for yield continues into the end of the year, investors may be rewarded with S&P earnings finally turning positive and higher dividends in growth oriented sectors. Three of the four top gainers in the Dow Industrials over the past three months were Technology stocks with relatively high dividends – Apple, Intel and Microsoft – while the lowest returns were found in ExxonMobil, McDonalds and Walt Disney. For the quarter, the strongest sectors in the Navigator® High Dividend Equity portfolio were Technology +12.4%, Financials +4.0% and Industrials +3.6%, and the weakest were Utilities -6.8%, Telecom -6.6% and Staples -3.3%. Stocks purchased during the quarter included PPG Inc, Microchip Technology, Morgan Stanley, Kinder Morgan, IBM and sales were Kimberly Clark, Lyondell, Wyndham Worldwide, Public Storage and Disney.
Sources: Bloomberg, *FactSet, Ned Davis
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The S&P 500 measures the performance of the 500 leading companies in leading industries of the U.S. economy, capturing 75% of U.S. equities.
The Dow Jones Industrial Average is a stock market index that shows how 30 large publicly owned companies based in the U.S. have traded during a standard trading session in the stock market.
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performers of developed markets outside the U.S. and Canada.
The MSCI Emerging Markets Index is a freefloat-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
The Russell 3000® Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.
Barclays Capital U.S. Government/Credit Bond Index measures the performance of U.S. dollar denominated U.S. Treasuries, government-related and investment grade U.S. corporate securities that have a remaining maturity of greater than one year.
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The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices and shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk. The S&P 500 measures the performance of the 500 leading companies in leading industries of the U.S. economy, capturing 75% of U.S. equities. The Barclays Capital U.S. Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented. Municipal bonds, and Treasury inflation-protected securities are excluded, due to tax treatment issues. The index includes Treasury securities, government agency bonds, mortgage-backed bonds, corporate bonds, and a small amount of foreign bonds traded in the U.S. The Barclays Capital Aggregate Bond Index is an intermediate term index.
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