Something has changed. You can feel it in the air.
I’ve been saying it for over a year: The stock market is headed higher.
As evidence, I will cite my recommendation of Bank of America (NYSE: BAC) to Wealth Daily readers from a year ago — February 27, 2013, to be exact. It was $11 a share at the time, and it’s now over $16.50.
Of course, there aren’t many stocks that aren’t higher now than they were a year ago…
What’s changed is that now, more people finally believe the U.S. economy is getting healthy and stocks deserve to rally.
(I do understand that you, as a Wealth Daily reader, have probably been profiting from stocks for a while now…)
Near as I can tell, the noticeable change in sentiment came this past December, when the Fed announced it would start tapering its QE3 bond purchases in January. You may recall that the first time the Fed mentioned it would soon taper — back in May — the stock market sold off hard on the news.
But in December, it was different. Stocks rallied when Bernanke said he would cut bond purchases by $10 billion in January. This was certainly a slap in the face to all the bears out there who thought the rally would be done for the instant the Fed pulled the plug on its bond purchases.
Put simply: the “sky is falling” crowd has been dead wrong. They’ve been wrong for 4 years.
That’s not to say there aren’t problems out there. In fact, the list is longer than my arm. It should go without saying that there are always problems.
But the truth is, we simply are not seeing the kind of problems that cause total market meltdowns a la 2000 and 2008-9.
Here’s why…
How I Learned to Stop Worrying About the Fed
When the Fed started its $85 billion-a-month QE3 spree, the bears said it would be inflationary. Adding that much cash to the system had to cause price imbalances, they said.
It hasn’t. And that’s because the money hasn’t gone into the economy. It’s sitting at the Fed, as part of banks’ capital reserves. Since it’s not in circulation, it can’t cause inflation or a horrible devaluation of the dollar.
The bears also worried that bond prices would get crushed — and interest rates would spike — when the Fed went to unwind its $3 trillion bond position.
That won’t happen either because the Fed isn’t going to push its holdings onto the market. It will let many of the bonds mature (Treasuries), and what it chooses to sell (mortgages) will be bought by willing investors.
We might wonder what QE3 has done for the economy. Well, not much. It pushed rates low enough to spur a big round of refis. And it’s helped banks’ capital structure. That’s about it.
I’ve advocated the end of QE3 for at least 6 months now — not because I thought it was creating massive imbalances and setting up the next market crash, but because I wanted the Fed to give the U.S. economy a vote of confidence.
As a parent, I know my kids wouldn’t have started walking when they did if I had always been there to pick them up and carry them around.
It seems to me that people really started to believe the U.S. economy could get on its feet when the Fed announced the taper would begin soon…
The Signs Have Been There
While the sentiment of the average American may have changed recently, the sentiment of the investor changed about a year ago.
Between 2009 and 2012, investors put a stunning $1.3 trillion into bond funds. At the same time, they pulled a net $75 billion out of stock funds.
In 2013, that changed. Bond funds got only around $16 billion in new money, while stock funds attracted $193 billion. Close to another $150 billion went into stock ETFs.
Slowly but surely, the average investor has come back to stocks…
At the most basic level, the reason is dividends. Since the stock market bottomed on March 9, 2009, S&P 500 companies have paid out $1.2 trillion dollars in dividends. In just the last two quarters, these companies have paid out $164 billion in dividends. (These figures come from the blog of the most excellent economist Ed Yardeni.)
In dollar amounts, dividends from the S&P 500 are in record territory. Investors have never collected this much money from Corporate America. This is, unequivocally and without a doubt, a very good thing — and a very good reason to own dividend-paying assets.
Right now, the S&P 500 is yielding 1.95%. A year ago, it was 2.2%. Total S&P 500 dividend payments grew 12% in 2013, and stock prices did even better. I expect we’ll see at least another 10% gain in dividend payments this year.
The biggest boost in dividends is likely to come from Bank of America. After all, it pays just $0.04 right now — a measly penny every three months. But last year, BofA was allowed to spend $10 billion on share buybacks and preferred stock buybacks.
This year, BofA could be allowed to return as much as $10 billion to investors in the form of cash dividends — a $0.92 annual dividend.
At current prices, that would be a 5.6% yield. But I can pretty much guarantee the stock won’t stay at current levels. Something around $19 or $20 is more likely.
Until next time,
Until next time,
Briton Ryle
@BritonRyle on Twitter
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
