Stranger Things

 

 

 

 

 

 

Eran Peleg, Chief Investment Officer 

 

Thursday, December 12, 2019

 

 

Stranger Things

 

5 Things in Today’s Financial Markets That Run Counter to Long-Standing Financial Logic

 

 

 

1. Bonds offer negative yields

 

Although the number has come down recently, more than 20% of investment-grade bonds globally are still trading with a negative yield-to-maturity. Yes, if you buy these bonds and hold them to maturity, you are guaranteed to get a negative return.

 

Market Value of Negatively-Yielding Bonds as a % of Total Outstanding

in Bloomberg Barclays Global Aggregate Bond Index

 

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Source: JP Morgan

 

 

2. Dividend yield on stocks higher than government bond yields

 

The dividend yield on the S&P 500 US stock index is normally lower than the yield on long-term US Treasuries. Only recently, in August, the US 30-year bond yield dropped below the stock market dividend yield, for the first time in a decade. Since then, it has moved back up a bit. Now, with the S&P 500 yield at 1.9%, large-cap US stocks are yielding more than 10-year Treasuries (1.78%) and still not much lower than 30-year bonds (2.22%).

 

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Source: Bloomberg

 

 

3. US Treasuries are yielding more than Greek government bonds

 

These bonds are not issued in the same currency (US in US dollar, Greek in Euro), so the comparison is not apples-to-apples -- and yet seems counterintuitive that bonds issued by the US government offer a higher return than those backed by Greece. Normally, higher risk comes with higher return.

 

 

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Source: Bloomberg

 

 

4. US companies pay out more than 100% of their free cash flow in form of dividends and share buybacks

 

According to Goldman Sachs, US companies have repurchased $3.8 trillion of their own stock in the past nine years. Buybacks last year hit a record in the US, reaching $806bn for S&P 500 companies. Now, companies are paying out more than 100% of their free cash flow in form of dividends and share buybacks, leaving some companies, including a few large prominent ones, with a negative book equity value.

 

 3.jpg

Source: Goldman Sachs

 

 

5. Apple is worth more than the entire US energy sector

 

With the rise in the value of growth stocks in general, and that of Apple specifically, the market capitalization of the company is now greater than that of the entire US energy sector.

 

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