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Investment Strategy

Hedging Our Bets

By Roger S. Conrad, on Sep. 30, 2015

The Federal Reserve opted not to raise interest rates at its September meeting and may not take the first step toward normalizing monetary policy until next year.

Dividend-paying stocks rallied in the immediate aftermath of this announcement, but this strength soon gave way to worries about slowing economic growth in China.

As we observed in Waiting for Yellen, a wide spectrum of dividend-paying equities posted robust returns during the Fed’s most recent tightening cycle, which lasted from the beginning of June 2004 to end of June 2006. However, these groups underperformed in the months before the Fed started to raise the benchmark interest rate to 5.25 percent from 1 percent.

The first phase of the cycle has definitely repeated itself: Since the end of January 2015, the Dow Jones Utilities Average and Bloomberg North American REIT Index have given up more than 10 percent of the their value.

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