I wouldn’t even have to look up the ticker symbol of Procter & Gamble Co (NYSE:PG) to tell it would be near its all-time high. Any company which pays a consistent dividend is worth its weight in gold in this market. Did investors suddenly change their portfolio management perspective? Nope, the Federal Reserve and other central bankers have suppressed yields causing investors to go up the risk curve and buy dividend stocks. A stock which pays a dividend is like a bond except, of course, the dividend can be cut at any moment. Stocks are an uncomfortable place for these pension fund managers, but they have to purchase them to chase returns.
It’s always a bad thing when an investor is forced into a position. I will give an analogy to explain this point. If a young investor is given the advice to buy technology story stocks because he/she can take more risk, this is likely going to end badly. The young investor is ignoring the place in the business cycle and the valuation of the securities. If you pigeon hole yourself into a particular investment, you will do badly. With interest rates at record lows and the S&P 500 having 5 quarters of negative earnings, this is the only explanation for stock valuations being at these excessive levels. The fact that pension funds need a certain amount of returns to pay off obligations is a problem for another article. The point is chasing returns a bad idea.
The chart below has become the most important one in predicting movements in the market, unfortunately. As you can see, the two liquidity pauses correspond to the corrections we had in the market in August 2015 and in January 2016. This crystallizes the point I was making earlier as investors are moving up the risk curve into stocks like P&G. I say this scenario is unfortunate because central bankers should be adding liquidity to prevent a crisis, not to endlessly boost stocks to improve the ‘wealth effect.’ This policy hasn’t boosted wages, unsurprisingly.