Riding the Back of the Bull Market in High-Yield Assets
Evidence of a stronger economy is showing up in the economic data as well as third-quarter earnings.
And it’s not just the upbeat performance from the past three months that has investors’ attention. It is that the market is enjoying the benefit of several tangible and intangible catalysts that are fueling the string of record closes for the major averages.
If robust earnings weren’t enough in themselves to pace the buying spree in stocks, there is also rising optimism about tax reform becoming a reality during the fourth quarter of 2017 or first quarter of 2018. After a deal was struck to extend Obamacare for another two years, the table was set for President Trump to finally put a check mark in the win column. The year is fast coming to a close and he has no major agenda items on his scorecard yet.
Financial deregulation, the proposed wall along the Mexican border, health care reform and massive infrastructure spending have failed to materialize even in the form of a congressional committee to formulate policy or a bill. Trump has used a pen and a phone to get some results, but this isn’t what his base voted for and it is clear he underestimated the resistance from the Republican establishment that has caused more delays than the folks across the aisle. If tax reform is passed, it likely will have several modifications built in to appease special interests. That I’m pretty sure of.
Three things will happen if and when tax reform goes through. First, it will be viewed as a huge boost to corporate earnings if, in fact, the corporate tax rate is lowered to 20% from 35%. Second, bond yields will rise with the expectation of gross domestic product (GDP) gaining at a faster pace above 3.0%. And third, the stock market rally will extend well into 2018, all the while as the nation takes on more debt to fund the federal government, the extension of Obamacare and account for a big adjustment for lower tax receipts expected in the next three years that is supposed to pave the way to higher tax revenues in the further years out, according White House Economic Advisor Gary Cohn and Treasury Secretary Steve Mnuchin.
While all this political policy plays out, income investors should stay focused on the one key takeaway, which is interest rates are likely to rise more over the next one to two years. Whether Fed Chair Janet Yellen, a self-admitting dove, or some other easy-money candidate takes the helm as Fed chair, the normalization of interest rates is in motion and the Federal Reserve dot plot plan is to raise the Fed Funds Rate by a quarter point in December and then three more times in 2018.
With that objective in mind, I would argue that high-yield assets that are tied to the prospects of higher equity prices are best suited for searching out dividend yields that range from 5%-10%. There are some special asset classes that are generating such returns and they deserve a place in one’s portfolio dedicated to high yield.
Private equity partnerships, covered-call closed-end funds, business development companies, select master limited partnerships (MLPs), floating-rate mortgage real estate investment trusts (REITs) and hotel REITs come to mind as viable candidates for generating fantastic yields and capital gains in an up-rate investing landscape.
Within my Cash Machine portfolio, we own such securities where the performance has been terrific. In fact, some of the total returns are beating that of the major averages, and that is saying a lot considering the year the stock market is having. I invite you to take a tutorial of Cash Machine by clicking here now and get familiar with a time-tested strategy that is hugely popular with income investors.
When Treasuries are paying less than 3%, certificates of deposit (CDs) are paying less than 2% and cash paying less than 1%, it might make all the sense in the world to investigate how your money can earn a blended yield of 8%-9% in a portfolio that is trading higher with the stock market and not tied to the fate of the bond market when rates rise, and bond prices fall. There’s money to be made when rates rise, and Cash Machine is the place to find out where.
In case you missed it, I encourage you to read my e-letter from last week about why the rally has not extended to the energy sector as much.
