Market Pulse: The year that was for interest rates
Special to the Bonanza
The year just ended, the sixth in a equity bull market, was both interesting and challenging.
It was also not quite what it seemed. While the S&P 500 rose 11.4 percent, its return overstated the market’s strength. In fact, the S&P’s return exceeded two-thirds of the returns on iShares sector ETFs.
To literally everyone’s surprise, utility stocks were the strongest. That speaks to the activity in interest rates. Where will rates go from here?
Interest rates will begin to rise around mid-year, but won’t go far and won’t rise quickly. With inflation and interest rates expected to be low, financial assets are priced for low returns.
How else can one explain the two-year rise in utility stocks? They have climbed so high that few yield even 4 percent, a level that was considered for years to be woefully inadequate.
Investors buying utility stocks month after month understand their attractiveness in a way Wall Street pros seem to miss.
Utilities provide income when it’s hard to find much elsewhere and that is attractive in a low-rate environment.
A year ago, with no exceptions that I recall, utility stocks were said to be the one area to avoid in 2014 after their rally in 2013 and the prospects for rising interest rates.
Just the opposite was true. Utilities were the best performers. A great year was followed by another great year. I don’t expect utilities to once again be so strong.
Also without exception, investors (including myself) thought interest rates would rise and Treasuries were unattractive. Instead, T-bond funds rose 24 percent. That speaks to going against the consensus.
Our outlook: I expect interest rates to rise in the second half, but rising rates may be a story more for 2016 and 2017.
Rates that are currently close to zero could approach one percent a year from now. Some believe a money-market fund, Treasury bill or CD yielding one percent will offer competition to dividend-paying (and raising) stocks.
Really? I disagree and I suspect you do as well. Bonds may offer more serious competition in future years, but not yet.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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