So Which Market Is “Getting it Wrong?”

Last week, Mike Larson did a great job of outlining some of the problems facing the global economy … and there’s no doubt they’re pretty big hurdles.

This explains why we saw yet another week of massive volatility, and some truly unprecedented moves in the major markets that I follow.

For example, yields on 10-year U.S. Treasuries hit an all-time low — a mind-boggling figure of less than 2 percent!

Meanwhile, after a brief period of calm, stocks plummeted all over again.

While the action is disconcerting to a lot of investors, I do want to point out that every time stocks sell off, the yields on dividend payers only become more attractive — especially when you compare them to those paltry Treasury yields.

In fact, at least 80 percent of the S&P 500 index’s dividend stocks are currently yielding MORE than 10-year Treasuries!

It’s perverse, when you stop and plot it out:

First, the U.S. government’s credit worthiness got downgraded …

Then, in reaction, investors mercilessly punished American companies — many of whom are sitting on their biggest cash hoards in history, and have the cleanest balance sheets of their corporate lives …

All while GORGING THEMSELVES on the very securities that got downgraded in a so-called “flight to safety!”

I realize that there are other forces at work beyond just the fallout from S&P’s U.S. downgrade and the debt ceiling debacle — namely, the strong possibility that we’re heading back into recession.

But let’s put that aside for a moment since the recession is bad for both the government’s debt situation and companies’ profit prospects.

Now let’s imagine that rather than downgrading the U.S., S&P came out and downgraded ALL of America’s biggest corporations instead.

Do you think that investors would run from Treasuries and pile into stocks?

No way!

So, on the surface, this seems like one of those ‘heads I win, tails you lose’ kind of situations.

Or, as one astute reader basically asked me, “Who has it wrong right now — the stock market or the credit market?”

My Answer Is That BOTH Markets Are At Least Partially Wrong …

Before I go further, let’s hang it all out there: You could certainly just go to all cash (or gold) and avoid the debate altogether. However, I don’t consider either approach entirely safe … especially for someone who’s looking to generate income in retirement.

A big cash position? Fine. A lot of gold? Okay, as long as you’re willing to ride out volatility there.

Still, let’s assume you want to allocate some part of your portfolio to the traditional investment assets (stocks and bonds) …

I’ve heard other experts basically describe the entire financial system as a tall building, with “safer” investments like Treasuries at the foundation and “riskier” assets like stocks at the top.

Based on this classic logic, even though Treasuries were downgraded … there is greater overall risk to the stuff at the top. And with Warren Buffett recently saying that the U.S.’s credit rating should still be “quadruple A,” you might be inclined to just accept this explanation.

In reality I don’t believe things line up quite so nicely — not these days.

I can see why, despite the problems in the U.S., Treasuries can still be considered among the paper assets with the highest potential for capital preservation … largely because of the dollar’s status as the world’s reserve currency.

That assumes you hold them to maturity, of course. And it does NOT consider the effects of inflation during the time you’re holding, which is ultimately what we’re implying by saying that Washington can just save the system by printing enough money.

So, in that respect, I think investors have been extremely foolish for piling into Treasuries lately — especially BECAUSE the Fed virtually guaranteed rock-bottom rates for another two years.

Meanwhile, I also think many stock prices should have moved lower in response to signs of a new recession — though not because of the U.S. credit downgrade nor the political environment.

However, I wouldn’t paint all stocks the same color.

In fact, I would argue that conservative, cash-rich dividend stocks are clearly the better alternative right now.

Like bonds, they will likely provide solid income throughout another recession and during this unprecedented volatility.

Unlike bonds:

• They are providing GOOD yields — and not just good on a relative basis, but on a broad historical basis in many cases …
• They are backed by entities with solid financials and cash piles, some with higher credit ratings than the U.S. government …
• Plus, their payments can continue rising as you hold them!

What about the obvious risk that further market declines will wipe out your payments and then some?

That is definitely a risk, even though dividend payers typically hold up better than most.

Yet you have exactly the same risk when you invest in Treasuries, especially via mutual funds or ETFs. And the longer your time horizon, the less of a concern this becomes.

Bottom line: Investors have been absolutely crazy to pile into Treasuries. I also think they have been wrong to sell off solid dividend stocks of recession-resistant companies. And I feel that there is a big opportunity right now for those of us who understand where the “wrongs” of these two markets intersect.

Best wishes,

Nilus

P.S. My next issue of Income Superstars will be going to press this week, and I plan on issuing new recommendations to take advantage of the madness I just described. So if you’re not yet on board, I encourage you to watch my latest strategy video and consider joining us right away. Heck, a full year will cost you just $39! Click here now for all the details.