Fortune
With the S&P 500 index up double-digits this year, the media is at it again, stoking fears of another crash.
“Stock Market Crash: Expert Shares Huge ‘Red Flag’ Signaling Recession,” says Business Insider. “Will the stock market collapse? This hedge-funder thinks so,” says New York Review.
And so on.
I suppose that makes sense, given that the S&P 500’s roughly 19% gain so far this year is well above its usual return. The fact is that 2023 does not exist in a separate vacuum of history, and just a tiny bit of history shows that we are not. Again in a bull market, and stocks are not overheated, despite their recent gains.
And as we know CEF Insiderwe can give ourselves an additional discount, and the greater peace of mind that comes with it, when we purchase our shares through closed-end funds (CEF) trading at a discount to net asset value (NAV, or the value of their underlying portfolios).
Without taking dividends into account, we’re still about 5% off the high we hit in the first two days of 2022. And with dividends, we’re 2.1% off the high. In other words, we are recovering from the bear market of 2022, but we are not still in a bull market.
This difference is important because if stocks were to simply move sideways over the next year, they would not return to their high point in about three years. That would mean a total of five years of stock stagnation, an event that hasn’t happened since the dot-com boom.
Before that, it only happened three other times, all of them logical: after the stock market crash of the 1920s, following the 1973 oil embargo, and during World War II.
Unfortunately, these precedents cannot teach us much today. I don’t think we can prepare for a Third World War, for example. Stocks (and for that matter money!) probably won’t matter much if that ever happens. And we are obviously not depressed.
As for 1973, a return of conditions similar to those we saw then was a risk in early 2022 (which is why the market crashed even when the data was good – anxiety over this scenario was simply too high). And if we had high inflation and low growth like the 1970s, stocks and the economy would struggle for a long time.
But that’s not how things turned out, with inflation falling and now moving ever closer to the Fed’s target range.
Inflation, after soaring in 2022, began to fall in the second half of this year. This is very different from the two years that began with the oil embargo.
The reason for this difference, of course, comes from the Fed: back then, the central bank’s monetary policy was loose, and now, as we all know, the Fed has been steadily raising interest rates and committing to maintain them at a high level for longer.
The bottom line is that while we haven’t had the major crises of the past that caused years of low returns, and stocks haven’t fully recovered yet, we have a great setup to buy.
GDV: managed risk with managed payments
Despite this, many people are still hesitant to get into stocks, and after the ups and downs of the last few years, I can’t blame them.
This is where a CEF like the Gabelli Dividend and Income Trust (GDV) can help. The fund pays a monthly dividend that yields 6.5% on an annualized basis while giving us a diversified collection of proven large caps like MasterCard
MY
MDLZ
These are all low volatility names in their own right. Additionally, if you’re worried about having too much exposure to stocks, you can take out that 6.5% income stream and invest it elsewhere while you wait for this market to move from recovery to new growth.
And thanks to GDV’s value orientation and selection of stocks offering sustainable gains and reliable growth, the fund has produced stable dividends for a long time.
GDV also gets less investor attention in 2023, no more, although its portfolio is seeing an uptick as stocks gain momentum. That pushed its discount to net asset value, or the gap between the value of the fund’s portfolio and its market price, into double digits. (Although it’s showing some momentum lately, which is a trend we like to see in CEFs – still a significant discount but starting to disappear.)
Ultimately, as we see growing investor interest in CEFs as stock market gains continue, thanks to falling inflation and the need to catch up with the 2022 decline, the discount on this $2.5 billion fund will likely return at the 2.4% discount. this was the case in 2018. In doing so, this will unlock capital gains, in addition to GDV’s income stream.
All that remains is to wait for more investors to jump into CEFs. But after a year of absence, I hope that moment will come sooner rather than later.
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 10.9%.»
Disclosure: none