The latest US jobless claims data have arguably brought the taper closer. In turn, the relative performance of US dividend-paying stocks has deteriorated substantially in recent weeks, mirroring progressively higher Treasury yield levels.
US data seem to have enhanced the market’s confidence that the Fed tapering process will begin sooner rather than later. The lowest initial jobless claim reading since September 2007, three months before the recession hit, suggests we are making good progress towards the assumed threshold for US tapering of an unemployment rate in the range of 6.5%-7%. Coupled with a modest increase in inflationary pressures, this backdrop arguably goes some way to validating the Fed’s intentions.
In turn, this has led to a situation whereby the outperformance of dividend-paying stocks relative to the broad indexâ€”one of the dominant themes in the US equity marketâ€”has been brought to a halt. The uptrend that has been in place since the first quarter of 2011 appears to be at risk of being broken. In addition, as our chart illustrates, the ratio of the S&P 500 Dividend Aristocrats index relative to the S&P 500, having peaked in April, is trading right at its 200-day moving average.
Overall, this indicator seems to suggest that, as a regime of higher Treasury yields is getting gradually digested by investors, equity market internals reveal the decreasing attractivenessâ€”at least temporarilyâ€”of ’search for yield’ as a theme driving investor behaviour. Arguably, this can also be seen as consistent with what the Fed may intend to achieve in terms of arresting the formation of financial market froth.
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