The Federal Reserve Delivered To The Markets As Expected
Fed chair Jerome Powell and the rest of the Federal Open Market Committee members concluded their scheduled two-day meeting on Wednesday. As expected, the Fed cut their short-term interest rate target by 25 basis points to 1.75%-2.0%.
The markets pulled back after the announcement only to close slightly higher than the previous day’s close. There are two more scheduled meetings in 2019 and the Fed is expected to reduce short-term rates one more time by 25 basis points in December and then hold steady.
The Fed has two mandates, full employment and maintaining inflation at a reasonable level. Both of those mandates are at levels the committee is comfortable, that is why we believe the Fed should not cut rates past December 2019. The U.S. consumer has been the driving force behind real GDP growth and there is no sign that it will slow anytime soon. The U.S./China trade dispute can certainly work its way through the system and slow the economy, but again we don’t think there’s an imminent concern; however, we are watching this very closely.
Lower short and long-term rates mean investors must look beyond bonds for income, which as we have been saying for some time now, will increase the demand for companies with a strong record of paying and increasing dividends. Another area that will benefit from investors seeking higher yields is asset managers that specialize in alternative investment. Traditional investments are stock, bonds and cash equivalents, while alternative investments are everything else, like private real estate, private credit and private equity.
There are two stocks that are market leaders in the alternative space, The Blackstone Group (Ticker: BX) and The Carlyle Group (Ticker CG). The portfolio companies owned by BX and CG are among the world’s largest employers in many different industries, which allows them a competitive edge. This permits them to gather intelligence on market and consumer trends before they are published by government and private agencies. As a result, they have been able to grow their operating earnings quickly and pay a good dividend. To put it in perspective, the dividend yield on the S&P 500 is 1.9% and the yield on the 10 Year U.S. Treasury Bond is 1.78%, while the dividend yield on BX is 3.63% and 6.47% for CG.
With low yields on the S&P 500 and bonds, investors will continue to move assets into stocks and asset classes that pay a strong dividend and have a strong prospect for good revenue and operating earnings growth. BX and CG have another factor in their favor, which we think will drive more demand for their stock. We will discuss it on next week’s market update.
Disclosure: The Blackstone Group (Ticker: BX) and The Carlyle Group (Ticker: CG) are owned by some Surevest clients and employees. This is not a recommendation to buy these stocks. Consult with your financial advisor before making any investment decisions.