“Seven Years Later, Recovery Remains the Weakest of the Post-World War II Era…”
That was the Wall Street Journal headline your editor woke up to yesterday.
Looking for a thoughtful idea to detail for you dear reader, I bit.
I read it. I reread it. And I was left with nothing. So much so I won’t even link to it.
The article was all about historical lengths and strength of expansionary periods.
Stuff like: The last one was six years...so this eight years is very long…
Nothing special. Nothing new. Nothing beyond the surface.
Worst of all, not a single idea about what you should be doing about it.
I guess that’s why we’re here.
So today I’d like to go over why one group of stocks could go far higher than most investors realize right now and are just starting to really take off.
It Can’t Happen Here...Can It?
The article points out all the economic facts and none of the causes.
For your editor, the clear cause of it all is low interest rates.
We’ve talked about low interest rates before.
They are a slow-moving economic destructive force that few will ever see until it’s too late.
The perfect example of what the U.S. economy has been in and where it’s headed is Japan.
The Japanese mega-bubble blew up at the end of the 1980s.
The central bank of Japan’s response was to slash interest rates.
The chart below shows the where the central bank of Japan has kept interest rates (source):
Japan cut rates down to near zero in the in the 80s and they haven’t budged since.
Nearly 30 years later all Japan has to show for it is about three decades of annual GDP growth around 1%.
The U.S. has done the exact same thing since 2008 and has the exact same result.
That’s bad for the future of the U.S. economy.
For investors, however, it presents a unique opportunity.
Right now interest rates are extremely low in the U.S.
In the next few years they will probably go even lower which makes two investments very attractive.
First is gold.
We’ve talking in the past how gold does exceptionally well when inflations rates are lower than inflation (termed: negative real interest rates).
The reason is because gold’s yield is zero.
In a negative interest rate environment, zero yield is higher than negative real rates which makes gold more attractive as a store of value.
The second investment which does really well when interest rates are low are dividend stocks.
Like with gold, cash yield from dividends becomes increasingly valuable when interest rates are so low investors can’t get yield anywhere else.
This is why we’re starting to see dividend stocks really start to take off recently.
Take a look at three indices, the Russell 2000 Growth Index (very little dividend yield), the S&P 500 (average yield), and the S&P Dividend Aristocrats Index (high yield).
Growth stocks led the way coming out of the 2009 market bottom.
They were the hardest hit going in. Naturally, they bounced back the biggest coming out.
The S&P 500, with a mix of growth and yield, followed in second place.
The Dividend Aristocrats came in last.
In the last year, however, interest rates fell more, economic growth slowed, and the Dividend Aristocrats took the lead.
In fact, the Dividend Aristocrats beat the Russell 2000 Growth Index by more than 20% and the S&P 500 by 10% in the last year.
Gold and dividend stocks may not be the sexiest stories, but in a low interest rate world, they tend to be the biggest winners.