Just when the Fed zigged, the treasury yield curve zagged. The widely expected March interest rate hike was supposed to help push fixed income yields higher too but then the opposite happened. Treasuries rallied on the news and the yields ended up dropping. So what happened? My take is that the market got a little spooked by the idea that the Fed may raise rates as many as two more times in 2017 in an environment where real wage growth is stagnant or maybe even declining. We saw a flight to quality on the notion that the Fed may hike too far, too fast and push the economy back towards recession.
If the treasury yields want to stay where they’re at, that could be good news for dividend equity ETFs. A couple of years ago, we saw traditional dividend-paying sectors such as utilities and consumer goods rally as investors searched for yields they weren’t finding in fixed income. A weaker than expected March jobs report, while not really an indication in and of itself that the economy is slowing, may give the Fed reason to keep a bit of a closer eye on things. If rates remain low and Q1 delivers strong year-over-year earnings growth (6-7% growth is currently forecast), dividend ETFs could be in a position to rally.
One of my top picks in the group right now is the Vanguard High Dividend Yield ETF (VYM).
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