One of my favorite themes throughout 2014 has been that lower interest rates are here to stay. One of the big tells early in the year was the outperformance of both Utilities and REITs, which each pay some of the highest dividends of any of the S&P sectors. I was writing about this in February in a post titled, “These 2 Sectors Are Pointing To Lower Rates”. Sure enough, not only have Interest Rates fallen all year but each of these sectors are up 25% year-to-date while the S&P500 is up just 10% and some of the smaller-cap indexes are only up low single digits. Investors are not getting the yield they’re looking for in the bond market, so they turn to high dividend paying stocks instead. These two have therefore been the biggest benefactors.
So heading into 2015, how should we position ourselves for this low rate environment? I don’t see any reason to get cute. Short-term, yea Utilities did great this year. No doubt about it. But structurally they’ve barely even broken out. I think one of the more impressive setups out there has to be the longer-term chart of Utilities relative to the S&P500. Here is a weekly line chart going back to 2008 showing this falling wedge well-defined by two converging downward sloping trendlines:
I think if this breakout is for real and can take out those April highs marked by the red horizontal line, we could really be off to the races. Not only can this be a great trade for 2015 (again), but would signal that interest rates aren’t going anywhere. The Fed Fund Futures market continues to price in record low rates for all of 2015 and these guys have been dead right from the beginning. The outperformance of higher dividend paying stocks confirms that and I believe that a big breakout in this chart above would really back up our low rates thesis.
Here is a closer look at the Utilities vs S&P500 chart above. This is a daily line chart showing the ratio bumping up against overhead supply 6 times since last summer. The more times that a level is tested, the higher the likelihood that it breaks out. So I think this one is poised to make a big splash in the first quarter:
This is one of the more powerful themes around the world that I am currently watching.
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