Earlier in May, I asked if Treasuries were in for a short squeeze. Two weeks—and another five basis points on the 10-year—later, and it’s looking more and more like that is the case. As I’m writing this, the 10-year Treasury yields just 2.4%.
Treasury yields at these levels would generally portend a recession, or at least a significant slowing in growth. And in fact, first-quarter GDP estimates were revised downward this week, to a negative 1%.
Yet if the economy is slowing…why are U.S. stocks continuing to hit new highs?
There are a couple things to keep in mind. To start, we are not in “normal” times. Stock prices are rising in part because there is nowhere else to go, at least domestically. So, even while stocks are priced a little on the high side based on CAPE, they are a more compelling buy than bonds at current yields. Secondly, I expect this period of lower-than-usual bond yields to persists for years to come based on simple demography—the retirement of the Baby Boomers means unprecedented demand for yield at a time of mild inflation.
But while U.S. stocks are “less bad” than bonds, that doesn’t necessarily make them a good investment choice right now. Valuations are significantly cheaper in virtually every major foreign market. My advice? Underweight U.S. assets and overweight international, with a heavy emphasis on Europe.
Action To Take
Buy the PowerShares International Dividend Achievers ETF (PID), a portfolio of high-quality serial dividend raisers predominantly based in Europe. Plan to hold for the next 12-24 months for returns that I expect to significantly outperform the S&P 500. Use a 15% trailing stop.
