Today, more than 18 months after the press started sounding the alarm about the recession, it continues! And we, the contrarian income seekers, are always happy to take the other side of this argument.
After all, this exaggerated fear-mongering gave us the opportunity to “guarantee” higher dividend yields than we have been able to achieve in years. Our purchasing window is still open, at least for now.
Even the banks are spreading fear these days. Like Société Générale, which recently warned that even a “whistle” of recession could cause a stock market crash like that of 1987. Washington, DC-centric sources are also picking up the story, with Politico writing plaintively: “If the bond markets don’t aren’t scary yet, they should be. »
But we, the contrarian investors are not afraid. Instead, we quietly go where the facts take us. And the data keeps telling us we should be purchaseI don’t sell. Our favorite game? Equity-focused closed-end funds (CEF)as many of these revenue plays are now earning the Treasury doubling 10% returns.
Let’s look at what this data says today, and then we’ll talk strategy.
Consumer Spending Holds Up, Creating Stock (and CEF) Gains
At its core, savings depend on people, and when people spend, savings are good.
The chart above shows personal consumption expenditures, which the Commerce Department calls “the primary measure of consumer spending on goods and services in the U.S. economy.” This is a general measure of what Americans spend on a variety of goods and services. This is up 5.8% from last year, although inflation is above the long-term average at 3.7%.
This means that Americans are not spending more because of inflation; they spend more because they have more money to spend And they have confidence in the economy. This is reflected once again in our low unemployment rate (3.8%, an almost unthinkable figure over the last decade) and our ever-increasing incomes.
When job openings start to decline, unemployment claims rise, or we start to see a significant increase in business defaults, we can take a more cautious stance – but there is no sign of any that for now. Until then, going for cash or seeking refuge in US Treasuries won’t work – ask anyone who has invested in iShares 20+ Year Treasury Bond ETF (TLT), the benchmark for long-term Treasuries these days.
Americans are getting used to ‘higher for longer’ interest rates
Recently, Treasury Secretary Janet Yellen said banks, businesses and households are accepting higher interest rates. “I haven’t seen any evidence of dysfunction related to rising interest rates,” she said.
If you’re a small business owner or looking for a home, you won’t care. How can she say we are “okay” with 8% mortgages when you could have locked in a rate of around 2%? for three full decades only two years ago?
But, as insensitive as her comments are, she’s not really wrong on a macro scale.
The total number of bankruptcies fell 4.9% in 2023, according to the administrative offices of the U.S. courts, and the total amount Americans must set aside to pay off their debts has not reached absurd levels, historically speaking, although it is a bit higher than the low interest rates of the 2010s, when credit was cheap.
None of this data suggests that there will be blood in the streets. Instead, it hints at the soft landing that the Fed is striving for and that we have experienced, at least so far in 2023.
What shall we do now?
With the economy firing on all cylinders and major stock markets taking a bit of a breather, the greatest value right now lies in U.S. stocks.
And we’ll leave aside the S&P 500 index funds that the BlackRocks and Vanguards of the world are peddling and go straight to where the big dividends are: equity CEFs, whose payouts have surged, thanks to the pullback we’ve seen lately. of months.
Consider, for example, the Liberty All Star Equity Fund (United States), whose top holdings include S&P 500 stalwarts like Apple (AAPL), Amazon (AMZN), Visa (V) And Microsoft (MSFT). This one currently yields 10.4% and also ticks the past performance box, delivering a 184% return over the last decade, almost all of which is in the form of cash dividends.
These are two reasons why the United States is attractive, but here’s why it has even more potential.
As the normal small premium in the US turns into a discount, a buying window is open here, but as things move quickly this opportunity is closing, as you can see on the right side of the chart above . But our chance to get this 10.4% yielding large-cap stock fund at a discounted price is still available, as the fear-mongering discussed above has kept many people away for too long .
But it’s starting to change, and when people really start coming back, it will change quickly, so it’s time to act.
Michael Foster is the senior research analyst for Contrarian perspectives. For more great income ideas, click here for our latest report «Indestructible income: 5 advantageous funds with stable dividends of 10.2%.»
Disclosure: none