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Rising Bond Yields Boost Insurers, Have Negative Impact on Stock Indexes

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LIFE INSURERS LEAD FINANCIALS HIGHER ... Rising bond yields continue to give a boost to financial stocks like life insurers. Bear in mind that premium income in insurance stocks is invested mostly in fixed income markets. Higher bond yields mean higher income. Life insurers are leading the financial sector higher today. Several of the big life insurers are seeing nice gains after beating earnings estimates. Chart 1 shows the Dow Jones US Life Insurance Index ($DJUSIL) climbing more than 2% today and nearing a new 2016 high. The index is in a clear uptrend, as is its relative strength ratio (top of chart). Several individual stocks are already hitting new highs.

RISING RATES ARE WEIGHING ON STOCKS IN GENERAL ... There's good and bad news in the prospect for higher bond yields. The good news is that it favors financial stocks. To the extent that rising rates are also hinting at higher inflation, it may also be good for commodity related stocks like energy and materials. The bad news is that rising rates are bad for dividend payers, and possibly even consumer discretionary stocks that are hurt by rising consumer prices. Which helps explain why stocks have been basically flat since midyear. More groups have been falling than rising. Since midyear, only three sectors are in the black: technology (+8%), financials (+6%), and industrials (+2%). Energy and materials are basically flat. All the rest are in the red. That's three up, two unchanged, and seven down (counting telecom). Combined losses in the four dividend paying groups (and healthcare) are bigger than gains in financials and technology (with tech turning down this month). That makes for a flat market with a downside bias. For the market to make any upward progress, either the more economically stocks need to strengthen and/or the dividend payers need to stop falling. That leads to a couple of possible conclusions. First, the net effect of rising bond yields has been negative for major stock indexes. That calls for a more cautious stance. Beneath the surface, however, money is rotating into stocks that should benefit from rising yields and higher inflation. That may offer a way to take advantage of the current situation. Chart 2 shows rising relative strength lines for stock ETFs tied to energy (red) materials (blue), and financials (green). Traders are also buying put insurance (volatility) to hedge against possible stock losses.

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