Why investors are moving into 'bond proxies'

Those stocks, with safe dividends, won’t be cut even if the economy stumbles.

By Jim J. Jubak Oct 18, 2013 3:54PM
Image: Stock investor (© Tom Grill/Corbis)With the shutdown/debt ceiling crisis behind us, the stock market is free to worry about a slowdown in U.S. economic growth and to hope for a delay in the Federal Reserve’s taper until sometime in 2014.

That’s pushing the U.S. market away from growth-sensitive stocks and toward what James Mackintosh of The Financial Times Friday called "bond proxies." That means stocks with safe dividends that won’t be cut even if the economy stumbles. 

Thursday's market leaders were telecom stocks (up 1.7%), utilities (up 1.6%), and consumer staples (up 0.8%) on a day when the Standard & Poor’s 500 stock index climbed just 0.67%.

The worry here, of course, is that a U.S. economy that wasn’t growing fast enough for the Fed to begin to withdraw any of it stimulus even before the shutdown/debt ceiling crisis will show even slower growth in the fourth quarter because of that crisis. And that the damage will extend into 2014 because we’re scheduled to revisit the shutdown and debt ceiling battles in January and February of 2014.

The hope -- for bonds themselves and "bond proxy" stocks -- is that uncertainty about economic growth will keep the Fed from beginning to taper off its $85 billion a month in purchases of Treasuries and mortgage-backed assets until January or maybe even March or April. That kind of delay would continue the post crisis rally in Treasuries that has sent the yield on the 10-year Treasury to 2.59% Friday from slightly above 3% in early September. 

Falling yields make the payouts from "bond proxy" stocks more valuable. For example, eight of the 12 stocks in my dividend income portfolio were up Friday as of 2:15 p.m. ET. Verizon (VZ), which isn’t part of that portfolio, was up 1.57% Friday.

How long this goes on will depend on how long the markets remain convinced that the Fed will delay beginning its taper. The Fed’s Open Market Committee, which will make that decision, meets on Oct. 30 and then on Dec. 18. Just about no one believes the Fed will have enough data to decide to begin the taper on Oct. 30, and the betting is, now, that the Fed won’t taper on Dec. 18 either.

The timing of the Fed’s calendar does mean that the markets won’t know they’re wrong -- if they are -- until the middle of December. The Fed recognizes this and if it intends to taper in December you should hear signals loud and strong from the central bank before that because the last thing the Fed wants is to surprise the financial markets at this point.

My opinion is that we won’t hear those taper signals in December.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. When in 2010 he started the mutual fund he manages, Jubak Global Equity Fund (JUBAX), he liquidated all his individual stock holdings and put the money into the fund. The fund may or may not own positions in any stock mentioned. The fund did not own shares of any company mentioned in this post as of the end of June. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here

Tags: VZ
18Comments
Oct 20, 2013 9:34AM
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Here’s one of my favorite statements from a financial expert back in 2008.

 

“Citigroup has been paying a dividend for over 100 years. There’s no way they’re going to stop now. It would be corporate suicide. At $30 per share, it’s a bargain.”

 

C Div History

7/31/2008    $0.32
10/30/2008   $0.16
1/29/2009    $0.01
5/25/2011    $0.01
7/28/2011    $0.01
11/3/2011    $0.01
2/2/2012     $0.01
5/3/2012     $0.01
8/2/2012     $0.01
11/1/2012    $0.01
1/31/2013    $0.01
5/2/2013     $0.01
8/1/2013     $0.01

 

Oh well, he wasn't entirely wrong, and a penny saved is a penny earned. Perhaps he was a distant relative of Benjamin Franklin.

Oct 19, 2013 10:32PM
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I personally don't even understand the "bond proxy" investment theory or term.

Just sounds like "newspeak" being passed around the investing and financial circles.

Much like one they started using a few months ago "comp or comps"..

 

I guess if you are using a 2-3" screen and only know how to text..

Then we will have to put up with "moronic" partial words that have double meanings..

I grew up with or used acronyms for about 30 years, before many newbies were born, but never had so many that we didn't know what they meant....The funniest: DNB (do not abbreviate). 

Oct 20, 2013 2:27PM
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The government recouped the cheap money from j.p.Morgan Chase.  If they go after the other big banks, the economy will be in a big hurt.  Chase is being fined for things done by the banks that the government begged them to buy.  Americans who have a mind know that this is unfair.  No one takes big risks when they see things like this happen.  We all feel like the government should be fair.  If it isn't' we don't feel safe in investing.  I have heard that without the financial institutions the economy will not regain momentum. If they are not safe all investments are suspect.
Oct 20, 2013 2:40PM
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The word of the day is: DYSFUNCTIONAL.
Oct 20, 2013 10:50AM
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How about beaten down preferred stocks with their huge yields, which are even greater now.These equities may go beyond their call dates for years while you collect those huge 7 - 10% yields !
Oct 20, 2013 7:34PM
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Dont know, but "Bond Proxies" sounds like a great name for a garage band.
Oct 19, 2013 11:00AM
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With the shutdown/debt ceiling crisis behind us, WTF? The crisis is on hold for a mere 90 days they're not even close to a solution with the Tea Party 1 percent already planning their next fiasco. So you think Apple, Google, Intel and Microsoft are bond proxies? Value stocks with slow growth with stable dividends are way better the consumer, drug, media and soda fads.
Oct 19, 2013 8:36PM
avatar

Reply -The Tea Party wants a balanced budget, less government and more freedom.  Why do you call this agenda a fiasco?

 

The Tea Party is composed of young hypocrites with misguided goals and objectives.  The Tea Party wants to deny the budget and debt required to honor the laws and regulations passed by prior US administrations in favor of fighting their insane religious crusades and greedy pursuits. If they truly wanted to cut spending then they would eliminate all foreign aid including Israel and stop the $1 trillion we've been wasting on defense welfare over the last 10 years.. That was $100b per year above and beyond our $800b annual defense budget. An F35 costs $120,000,000 per copy and they want to order 3,100 for a cost of $372 billion.  That's $1860 of my taxes that I don't want spent.

 

 

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