The three-day short covering rally that provided some near-term relief saw most defensive sectors and stocks take a breather, affording some pin action in the popular technology, consumer discretionary, financials and health care companies. But true to form, the rally in oil prices stalled out early Friday morning and so did the global equity rally. The long awaited uncoupling of stocks and oil hasn’t materialized and, for all we know, may not any time soon.
The Fed also has left the fixed income markets in limbo, toying with the idea that another rate hike in March remains a viable option. Last week’s readings of the Producer Price Index (PPI) and Consumer Price Index (CPI) both came in higher than forecast, coupled with a higher reading for the January Industrial Production (0.9% versus 0.3%). With the door open for another quarter-point bump in the Fed Funds Rate, I would expect markets to pause before adding to the recent gains, while a break back below $30 a barrel for WTI crude will invite downside pressure.
Taken at face value, the economic calendar of the past week shows the domestic economy is faring better than those in Europe, Asia and Latin America. But we have to remember that a contracting global economy will eventually drag down gross domestic product (GDP) in the United States, and that is what the Fed funds futures market is signaling to Fed leadership that doesn’t fully see it that way. Currently, the Fed funds futures market assigns only an 8% probability of a rate hike in March, meaning there is an obvious disconnect at work that could be disruptive to equity markets if the Fed hikes rates.
When Fed rhetoric and markets are seeing the future from two very different perspectives, it’s best to stay invested in ultra-defensive, dividend-paying stocks and not reach aggressively for outsized yield. The market may be forming a bottom, but it will be a volatile bottom in the making. There has been a lot of talk of oil production freezes, more quantitative easing (QE) and stabilizing of bad debt, which has the S&P back up to 1,910 from 1,810 in just a week’s time. That said, this is all just talk with promised actions to follow. Nothing is certain at this time. Thus, investors should be patient and seek out concrete measures that provide a rationale to increase one’s risk profile into higher-yielding assets.
Until then, I view it to be prudent to have a decent weighting in the best-of-breed utilities, telecom providers, data center real estate investment trusts (REITs), self-storage REITs, skilled care REITs and consumer staples companies that pay dividend yields of 4-5%. At Cash Machine, we have a Safe Haven Portfolio currently holding eight select stocks that fit this strict profile, with new names being steadily added week after week and several recommendations trading to new all-time highs in this chaotic market. My take on this kind of performance is not to buck the trend, but rather go with the flow, as in money flow. Big institutions and fund managers are ploughing capital into these sectors and specific stocks that I’ve recommended to our subscribers.
Riding out the global stock market storm in an all-weather portfolio, paying a blended yield of 4.5%, that is hitting new highs is what invested capital is best served doing in a market full of unknowns ahead. Now is time to exhibit patience, cut losing positions in any rallies, and redirect monies to the most well-positioned, branded companies that provide essential goods and services to consumers and businesses. The storm will eventually pass. However, before it does, more damage can take a toll on one’s portfolio. Such damage can be avoided by taking necessary and proper action, as I advise subscribers of my Cash Machine investment newsletter.
Attend The MoneyShow in Orlando, March 2-5!
Receive free admission to the MoneyShow in Orlando, Florida, as a guest of Eagle Financial Publications and me. The show’s new venue is at Disney’s Contemporary Resort near the company’s famous theme parks. I especially encourage you to attend my presentation, as well as those of my colleagues Mark Skousen and Nicholas Vardy, among more than 150 other speakers who will address a range of income and growth investments. Register today at orlandomoneyshow.com.
In case you missed it, I encourage you to read my e-letter column from last week about what fears of recession are doing to Treasury yields. I also invite you to comment in the space provided below.