Equity & Bond Markets Surging Together: Here's How To Invest

U.S. stocks are skyrocketing since the beginning of 2019. All three major stock indexes – the Dow, S&P 500 and Nasdaq Composite – provided impressive double-digit returns in the first four months. In fact, the S&P 500 and Nasdaq achieved new all-time highs, while the Dow is quickly approaching that mark.

A common feature of financial literature is that strong equity markets are generally associated with a soft bond market. When the stock market goes through a bull phase, investors tend to withdraw money from fixed income securities to invest in risky assets like equities and vice versa.

However, something interesting is happening in 2019. According to Bank of America Merrill Lynch (NYSE:BAC), inflows to U.S. high-grade funds and exchange-traded funds averaged a record $846 million per day in March. Moreover, on Apr 26, yields on major U.S. Treasury Notes declined sharply despite robust first-quarter GDP data.

Why Equities Gaining?

U.S. stocks have rebounded sharply in 2019 primarily owing to three factors. These are a possible solution to the U.S.-China trade conflict, a dovish monetary stance adopted by the Fed, which stands diagonally opposite to a highly aggressive attitude adopted in 2018, and a recovery of crude oil prices, which fell to the lowest level in eight years in the fourth quarter of last year.

Moreover, a series of strong economic data in March, including non-farm pay-roll, ISM manufacturing index, retail sales and durable goods orders data strengthened investors’ confidence in stock markets. Additionally, better-than expected GDP, manufacturing PMI and trade data of China reduced some concerns about an impending global slowdown.

Why Bonds Gaining?

Despite the above-mentioned positives, some genuine concerns about both the U.S. and global economy persist. This was evident from a low level of volume trading in equity markets especially since March, which compelled several economists to comment that the ongoing bull run is not broad-based.

The robust 3.2% growth of the U.S. GDP in the first quarter is primarily boosted by two transitory factors – an impressive trade surplus and large accumulation of inventories. However, these two factors can fade out in the near future. Importantly, industrial production has declined in the first quarter as a whole.

Moreover, despite a robust labor market with a record low unemployment level and a jump in consumer spending, the core PCE price inflation –- the Fed’s favorite inflation gauge –- declined to 1.6% in March from 1.7% in February and stands way below the central bank’s target rate of 2%. Muted inflation may compel for a rate cut in the future to promote growth. Low interest rate will increase bond prices in the future.

Expecting a possible rate cut in future, investors are investing in safe security government bonds today, resulting in sharp decline in yields. Additionally, concern about a global economic slowdown is still not over. The Eurozone economy is not out of wounds. Further, the central banks of Australia, South Korea and Sweden have also adopted a dovish stance anticipating economic slowdown.

Our Top Picks

At this stage, it will be lucrative to invest in high-yielding stocks in order to ensure a steady income stream. We narrowed down our search to five such stocks with a Zacks Rank #1 (Strong Buy) and high-dividend yield. These stocks also have strong growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows price performance of our five picks year to date.

Abercrombie & Fitch Inc. (NYSE:ANF) operates as a specialty retailer of premium, high-quality casual apparel for men, women, and kids. It has a dividend yield of 2.8%. The company has expected earnings growth rate of 20.9% for the current year. The Zacks Consensus Estimate for the current year has improved 35% over the past 60 days.

Herman Miller Inc. (NASDAQ:MLHR) is a major American manufacturer of office furniture, equipment and home furnishings. It has a dividend yield of 2%. The company has an expected earnings growth rate of 24.4% for the current year. The Zacks Consensus Estimate for the current year has improved 3.6% over the past 60 days.

Foot Locker Inc. (NYSE:FL) is a leading global retailer of athletically inspired shoes and apparel. It has a dividend yield of 2.26%. The company has an expected earnings growth rate of 10.4% for the current year. The Zacks Consensus Estimate for the current year has improved 6.1% over the past 36 days.

Popular Inc. (NASDAQ:BPOP) provides various retail, mortgage, and commercial banking products and services. It has a dividend yield of 2.1%. The company has an expected earnings growth rate of 38.2% for the current year. The Zacks Consensus Estimate for the current year has improved 9.7% over the past 60 days.

H&E Equipment Services Inc. (NASDAQ:HEES) is one of the largest integrated equipment services companies in the United States. It has a dividend yield of 3.6%. The company has an expected earnings growth rate of 10.8% for the current year. The Zacks Consensus Estimate for the current year has improved 4.9% over the past 60 days.

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