Counterintuitive. Different. Odd. Not really possible.
Those are the terms you often hear when investors noodle over how in heck we could have such incredibly strong job growth -- 211,000, on average for the last three months -- and the drug stocks, real estate investment trusts, health cares and utilities are among the strongest stocks out there.
Now, I am sure there are plenty of glib investors who are out there saying things are better than expected for every company, given tax reform and job growth without inflation. I can buy that. You might also be able to argue that the absence of a yield spike in treasuries -- with the 10-year at the inconceivable 2.84% rate, inconceivable given that we have such broad labor participation and many of the jobs are in construction and manufacturing -- means that that 10-year isn't as competitive to higher-yielding stocks than we thought it was.
Makes sense. When rates were screaming through 3%, as the economy was just building a head of steam, these stocks were collapsing. So why shouldn't they be going higher now as the move reverses?
Except, of course, those treasury yields shouldn't be going down. I don't care that wages aren't growing much. The simple fact is that on every conference call I am on, at least, I hear about inflation: inflation in freight costs, inflation in raw materials, inflation in labor. And let's not forget the tariffs -- because, of course, they are inflationary by design.
Still, at this point in the cycle, we should be in vicious rotation mode, out of what we are buying and into what's doing nothing: banks and industrials, which benefit from the higher yields we should be getting right about now, but aren't.
Of course, the opposite of that is happening, because of fears of a trade war and a potential slowdowns in autos; because of world commerce breakdown and housing; because of the Fed. But remember, the employment number we got last week definitely showed no slowdown whatsoever in any economically sensitive sector.
All that said, let me posit some thoughts about what the heck is going on.
First, the thirst for anything domestic is so overwhelming that you can see why investors like the real estate investment trusts and utilities. Are there holes in the investment theses from the point of view of these companies?
Absolutely not. The winning real estate investment trusts are those connected with brick and mortar shopping and, while we may not want to believe it, these companies are, on average, doing much better than many would believe. Witness that Toys 'R Us just closed 700 stores and the group went higher, because there is tremendous confidence that the spots will be filled quickly with hobby stores, specialty grocers and gyms. When you combine the higher, sustainable distributions -- sustainable now that we no longer fear Amazonian disruption as much as we did -- with the better yields versus Treasuries, and the strength does make some sense.
We tend to think that there's not a lot of economic sensitivity to utilities. I think that's because we have pretty much given up on being a growth nation when it comes to large-scale factories, which are the principal users of electricity. However, there's been a manufacturing rebirth -- you don't create 213,000 manufacturing jobs and 282,000 construction jobs and not conclude there is one. I speak to enough utility companies to know that demand is higher and the more customers they have, the better they do. And boy oh boy are they doing well.
Health care? This one's a tough nut to crack. Unless you think that this economy is going into recession because of the tariffs, that it will literally hit the wall, it's really hard to fathom.
I can give you some theories. The strength in big pharma has to do with ever-larger dividends versus ever-shrinking yields. Consider Pfizer (PFE) : It boosted its dividend by 6% recently from 32 to 34 cents a quarter. It was only 24 cents less than five years ago. Pfizer is typical of the group.
Then on the other side, there is innovation. if Biogen's (BIIB) Alzheimer drug works, then that stock shouldn't be up just 60 points, it should be up double that, or even triple. That's not glib. That's how starved the market is for big innovation -- and with ETFs, one stock can lift a lot of others.
All that said, I go back to my original thesis. While these are seemingly terrific rationales for each group's strength -- trade wars wrecking synchronized growth, rates going lower, new-found domestic strength -- it's all a little glib and feels mighty transient until the bigger issues in the world's economies get resolved.