Dividend stocks make a comeback in search for safety
Momentum shares are down more than 7pc as investors rush back into 'boring' high-yielders
What we are witnessing in the US stock market isn't simply a tumble in high-flying momentum stocks but a rush back into what passes these days for high yields.
While the sometimes stomach-turning falls in stocks like Twitter - down 23 per cent this week - get much of the attention, to understand what is actually happening you ought to pay attention to far more boring names like Procter & Gamble, which carries a healthy yield and has outperformed in recent weeks.
This may imply not simply a sudden caution towards unproven business models and high valuations, but perhaps a wider set of concerns about the economy.
While the average stock in the Russell 1000 index is down 2.02 per cent since March 5, there is a huge gap between the 300 shares in the index that pay no dividend and the 300 highest-yielding, according to Bespoke Investment Group.
The momentum shares, for want of a better term, are down more than 7 per cent, while the high-yielders are up a bit more than 2 per cent.
According to Societe Generale data, the single most important characteristic driving equity returns in the past month has been dividend yields.
High-dividend stocks in Britain, for example, have outperformed low-dividend ones so far this year by the most on record outside a bear market.
Investors prefer high-yielding shares in a bear market because they tend to have more stable business operations, with better balance sheets and better ability to withstand economic slumps.
The whole concept of momentum shares is somewhat nebulous, given that it describes not a business model or even a set of balance-sheet or other financial characteristics but rather simply a price phenomenon - the tendency to keep going up.
A stock that investors principally own because it goes up, as opposed to based on some fundamental analysis of its prospects or value, is one that can easily move very rapidly in the other direction.
"Why do we worry? Well, if momentum stocks are bought solely for their positive price momentum, it also follows that once they lose that momentum, the principal reason for buying them in the first place disappears," Andrew Lapthorne, a quantitative analyst at Societe Generale, wrote in a note to clients.
"The risk is that this initial selling evolves into systematic selling, which ultimately leads into something potentially more problematic than a 'healthy internal market correction', to paraphrase some market commentary we read somewhere."
Apart from some stocks like Twitter, the momentum sell-off has been marked but not a bloodbath. High-momentum shares have underperformed lower-momentum ones by 3.3 percentage points this year globally, and by 3.2 per cent in the US.
But considering that the balance sheets of momentum stocks are as risky as they've been since 2009, the implied risk may be greater than the absolute price moves thus far show.
The move into dividend stocks is also interesting within the context of lower overall interest rates, which, in general on most assets, have been declining in most markets.
Yields are low compared with their 10-year averages, not just in high-yield equity but also in corporate bonds in general and junk bonds specifically.
A preference for safety, combined with a willingness to accept lower yields, amounts to a market calling for less impressive growth.
That doesn't mean a crash or a recession, but it bears watching very closely.
Given that the US Federal Reserve is tapering its bond purchases, which have a knock-on effect on all riskier asset classes, this is especially noteworthy.
Investors seem to be pricing in effects and trends happening despite Fed action rather than because of it.
If you believed that the Fed was going to continue to back away from asset purchases but that the economy might weaken, you too would be seeking safer assets and be willing to accept less in yield.
After all, if the Fed doesn't see asset purchases as an effective tool, and has only very little it can do conventionally, it might be a good time to own some boring dividend payers.
In other words, the question may not be "What will the Fed do?" but "What can the Fed do?"