Tahoe Market Pulse: Looking at the markets, post election
November 30, 2016
After election day, investors quickly put money to work in stocks, expecting fiscal stimulus and a pro-business climate to lead to accelerating GDP and profit growth.
The financial sector and infrastructure plays did best. Gold fell (what inflation?). Dividend paying (and raising) stocks lagged, but these investors get paid while they wait for better days.
Bond investors reacted quickly, too, selling funds and ETFs along with individual issues. They expect growing demand for credit, larger deficits and inevitably more Treasury borrowing, all of which will put upward pressure on interest rates.
The yield on the 10-year Treasury quickly spiked to 2.3 percent from 1.8 before the election. We saw similar spikes last winter, in 2015 and in years before. In all cases investors overreacted and rates fell back.
That could happen again, or not if GDP growth accelerates robustly and inflation prospects rise along with the economic outlook.
Investors selling bonds, funds and ETFs are sacrificing income to hold cash equivalents that pay next to nothing while they wait for higher yields later on, if they appear. A lot can happen to the economy and the markets between now and “later on.” Stock investors will get paid to wait. Bond investors are in effect paying to wait (by earning less).
Preferred stocks gave a little ground in thin trading post-election, then recovered. I do not foresee an environment in which a six-percent return, with a qualified dividend or in some cases interest, will be unattractive.
I can see one in which six percent will equal or exceed the return on the S&P 500 and with far less risk. Renaissance Re’s two preferreds (C and E) are rated BBB Plus and just went ex-dividend. Few preferreds are rated so high. ING has two issues (symbols ISG and ISP) that trade near par and yield more than 6 percent. Both are rated BB Plus, one notch below investment grade.
Bottom line: Investors expect better days for the economy, profits and stock prices. They believe new policies will stimulate the economy. But it’s a bet, not a certainty. Things can happen. Good things, bad things, surprising things.
If you want certainty, buy a CD or a T-bill. No thanks. If interest rates continue higher it will be for good reasons — rising credit demands in a growing economy — not because inflation is accelerating. Growing profits will follow. That will be a good environment for stock investors.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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