by Jason Norris, CFA
Senior Vice President of Research
The Calm Before the Storm? Though this week proved to be full of newsworthy events (the Republican National Convention, Hurricane Isaac and the Fed’s Jackson Hole meeting), none of them proved especially “market moving” as stocks and bonds ended the week flat. While volatility this year has been a fraction of what we experienced the last few summers, we expect this to change as we move closer to the election and the Fiscal Cliff.
The Big Money With corporate America earning record profits, even in this slow growth environment, many companies have begun returning that cash to shareholders. In fact, companies in the S&P 500 are estimated to pay out close to $295 billion in dividends the next 12 months, up 16 percent from the previous year. Leading the way in this growth rate is the technology sector where total dividend payments are expected to rise from $26 billion to $42 billion; a whopping 60 percent increase. As a result, the technology sector is now the second highest payout sector in the market, behind only consumer staples. A main driver of this increase is Apple’s initiation of its dividend ($10 billion) and a 75 percent increase in Cisco’s.
One Little Victory Speaking of Apple, the company will be receiving another cash injection thanks to a judgment they won over competitor Samsung. While $1 billion is just a drop in the bucket for Apple, the real victory for them is that this judgment may give Apple an additional competitive advantage for new products going forward. We believe that competitors will have to slow their product development process to ensure they do not infringe on Apple patents. As a result, Apple’s share of the smartphone market should continue to grow.
We Hold On Even in the face of strong cash generation, retail investors are still fearful of equities. The European fiscal crisis, coupled with the Flash Crash in the spring of 2010, has resulted in a withdrawal of $300 billion in domestic equity funds since May of 2010. In spite of record lows for interest rates, taxable bond funds have been the main recipient of this cash with over $400 billion invested.
Something for Nothing Corporate Treasury departments are taking advantage of record low interest rates. To that point, $238 billion in debt was issued in the month of August, which is the highest on record. This isn’t just a U.S. phenomenon. Companies across the globe continue to issue debt at bargain basement prices. Even though absolute rates are low investment grade bonds are yielding close to 100 basis points over Treasuries.
Our Takeaway from the Week
- We continue to favor corporate bonds over Treasuries due to additional yield, as well as strong corporate balance sheets
- Stocks should offer an increasing flow of income as corporations pay out more of their cash to shareholders
- We expect global and domestic markets to exhibit higher volatility as we move toward our election, the Fiscal Cliff and a fix in Europe