The "Dividend Momentum" Trade is Stalling... Here's What's Next

 Has Fed Chairman Ben Bernanke solved the world's problems?

 

Looking at the performance of stocks, bonds, and real estate over the past few years, you might think so. The benchmark S&P 500 is up 28% in the past two years. Bond prices have soared. Home prices are up 10% from last year.

 

These markets are rising on a wave of very cheap credit and central-bank money printing. But this experiment will end badly. It will end in a market bust and social upheaval. But don't forget that asset prices can rise for years – and reach unimaginable heights – before that happens.

 

In fact, we are at what is likely an important new phase of the cycle...

 

 Right now, the market believes Bernanke HAS solved the world's problems. Construction spending, manufacturing, and private employment are gradually improving. Bond yields are rising. They're up because investors expect that a stronger economy will raise demand for credit.

 

We're also seeing an important change in market psychology...

 

 In early 2012, we predicted that money would flock to the safest dividend-paying blue chips, like Wal-Mart, Johnson & Johnson, and Procter & Gamble.

 

These are the safer, "defensive" names money managers buy when they are wary of the broad market and a struggling economy. We figured their buying interest would lead to a "momentum trade" in dividends.

 

Our prediction was right on. Stable dividend-paying blue chips have soared. Johnson & Johnson climbed from $65 per share to $88 today. Procter & Gamble climbed from $65 per share in mid-2012 to $82 today.

 

But in the past few weeks, we're seeing the "defensive" blue chips decline... and "growth oriented" companies, like Ford Motor Co., do well.

 

A rotation of money is taking place.

 

 Below is a chart that displays the returns of Johnson & Johnson, Procter & Gamble, and Ford over the past few weeks. As you can see, the defensive blue chips have declined... while Ford has surged more than 10%.

 

 

 This change in market psychology signals a growing interest in equities that benefit from economic expansion. It signals the market is growing more comfortable with the idea that Bernanke has fixed everything (even if the fix is temporary).

 

Look for Ford and other manufacturers of goods to do well.

 

– Brian Hunt