10 Years Later, Many Deep Scars From the Financial Crisis Remain
One thing that did occur in the financial crisis is that long-term Treasury bonds saw their value scream higher. There is an inverse relationship price between price and yields, which means that savers today effectively have to pay a larger premium for locking in a sure return over the long-haul. It also means they are getting lower returns for that guarantee.
The 30-year Treasury yield historically has been considered the ultimate safety trade for long-term savers. When yields are great, you can lock in that yield for 30 years and just live off the coupon payments. Even in 2018, the yield on the 30-year Treasury bond is barely over 3.1%. That is up from July of 2016, when the 30-year Treasury yield was barely 2%, but the yields of today are still a half-point lower than they were at the start of 2014 and are a full 2% lower than they were on average for one-third of the time between January 2016 and June of 2017.
3. There Are Still Negative Yields Outside of the United States
When investors buy into debt, they are effectively loaning money to a borrower, and let’s just assume that borrower is one of the governments in Europe or in Japan. They are supposed to receive interest for being the creditor. That’s at least how it has worked until recent post-recession years. When Europe and Japan delved further into quantitative easing than the United States could have ever imagined, they went so far as to have negative interest rates. This is where a creditor is so happy for the safety of lending money to a government that they are willing to accept a slightly lower payout in the future.
Having a negative yield on a debt would have sounded crazy in decades past. If inflation and hyperinflation are risks to real long-term savers, imagine if you locked in a negative yield for 10 years or more and what that would do to your savings. Still, that’s where we are. It is almost as if global investors inside and outside of these countries who lend to them are paying a sharp storage fee to a foreign equivalent of Fort Know to protect their cash from roaming hordes of thieves, barbarians and brigands.
24/7 Wall St. recently discussed how eight nations currently are suffering from sky-high interest rates and inflation. That just isn’t the case in much of Europe and in Japan. Interest rates remain low in most of the developed world today, but the thought that there are still negative yields, where investors and banks are willing to receive less than they lent to a government, should baffle the hell out of the rest of us.
4. Many Major Bank and Non-Bank Dividends Are Still Lower Than Pre-Crisis Levels
Bank stocks were serious dividend stocks ahead of the financial crisis. Lending all the crazy mortgages, the cash-out refinancing and having credit cards and credit lines out to anyone who could stand on two feet was insanely profitable — right up until it wasn’t. Then the you-know-what hit the fan. The major banks all came under the thumb of regulators, going into and after the bailouts, and much of the oversight today is far more restrictive on what banks may do with their earnings. That’s mostly a good thing, with some exceptions, but banks have to get their capital allocation plans approved, along with stress tests and reviews of capital ratios for deciding how much they can spend on stock buybacks and how much can be paid out for dividends.
Many of the top banks have seen their dividends recover handily, but the two money center banks with the bulge bracket investment banking arms still have lower dividends on their common shares than they did from before the financial crisis.
Bank of America Corp. (NYSE: BAC) had a $0.64 dividend in mid-2008 that went down to $0.32 for one single quarter before getting slashed to $0.01. That one-cent paltry quarterly dividend was not raised until mid-2014, when it went to five cents. Now the dividend has been raised from $0.12 to $0.15 this year.
Citigroup Inc. (NYSE: C) had a $0.54 quarterly dividend per share back in 2007, but it dropped to $0.32 in 2008, before being slashed to $0.16 for one quarter and ending up at the same $0.01 per share at the start of 2009. That one-penny quarterly dividend could not be raised until mid-2014, when it went to five cents. In 2018 the dividend was raised from $0.32 to $0.45.
And look at the situation at General Electric Co. (NYSE: GE). GE is a non-bank that was for years evaluated as half-bank and half-conglomerate. GE has never fully recovered and was even kicked out of the Dow Jones industrial average (and replaced by Walgreens!). GE’s shares have lost more than half of their value in just over a year, it keeps paring down financial activity, and its dividend is still at risk. GE might not be a bank, but its structure after 2020 may not even exist as it is thought of today.
5. Many Investors Remain Scared and Think Stocks Are Set to Crash All Over Again
Many investors simply have not participated in the great bull market that is about 10 years old. In the peak of the craziness in the financial crisis, stock investors were witnessing what might have become a total meltdown. That could have happened, but it didn’t. And the low yields from bonds were one of the signs telling investors that the risk was worth the reward after March of 2009. The S&P 500 bottomed out at a price of roughly 666 at the time. The S&P 500 peak of 2007 was roughly the same as the peak of 2000, which we will call a rounded number of 1,500 for argument’s sake. It was not until the end of 2012 and the start of 2013 that the S&P 500 recovered all its losses.