The simple fact is that just about anything with a dividend or current yield of any kind will rally when interest rates are on the decline.
It is like shooting fish in a barrel to be frank. For the past 10 years, this was the case for 90% of income-bearing assets until the November election of 2016, when the bond market determined that the great rally in bonds officially was over.
Regardless of the fact that the Trump agenda has all but been thwarted at every turn, there already was well-seeded momentum for the domestic economy that was going to show up in the data no matter who won the election. The extra jolt of optimism garnered by the Trump win and the promises tax reform, health care reform, immigration reform, infrastructure spending and financial deregulation was like pure oxygen being pumped into the ballroom hosting a late-night party.
However, let me go out on a limb and make a few observations about why the bull market will prevail with or without any Trump initiatives becoming enacted policy. We are currently 10 months into Trump’s administration and there is yet to be one single piece of game-changing legislation passed. In addition, the pending passage of tax reform looks like it may extend into 2018. At least, that’s how I see it.
This is not a done deal in its current form, not by a country mile. Again though, and this is purely my view, the stock market isn’t rallying on the expectation that a single piece of legislation will have any kind of serious impact on the lives of businesses and consumers. If it was, I would be very worried about a broad correction should tax reform fail.
Political gridlock is the sad reality of Capitol Hill, and Donald Trump simply has too many enemies on both sides of the aisle that prevent his agenda from being effectively implemented. The powers that be simply won’t allow President Trump to have a place in the history of political accomplishments. It has become crystal clear that Mr. Trump realizes that he isn’t in a reality show and will compromise his base because, apparently, ratings matter more than reality. What happened to Mr. Smith goes to Washington?
The situation is truly that visceral in Washington because of the clash among three well-defined camps of morality at war. The very liberal progressive camp sees the world completely opposite that of what middle class populism represents. The God-fearing “Don’t Tread On Me” morality of the Freedom Caucus/Tea Party also is a force. Then, add to this mix the Establishment morality that includes the most centrist and powerful Democrats and Republicans, aka: The Swamp, that are ruled by hypocrites, special interests, corruption and an insatiable lust for power.
The infighting among the factions has a chokehold on Congress, the White House, the Department of Justice and the court system. What that means, though, is the stock market feels no serious threat of real change emanating from Washington any time soon. Hence, gridlock as usual is a green light for focusing on the positive aspects of the economy.
The market’s reaction to the announcement of the tax package was about as exciting as watching paint dry. Clearly, the story of the day surrounded the third-quarter release of Apple’s earnings. Nobody gives a damn about first-version drafts of any kind of legislation.
This isn’t America’s first rodeo with Capitol Hill. We’ve recently been flimflammed by three drafts of health care reform that ultimately failed and resulted in a hurry up effort that ended up as a two-year extension of Obamacare. If not, the whole health insurance system would have imploded come enrollment period sign up time.
I think that Trump just wanted any kind of plan to pass so as to put a check mark in the win column. That whole fiasco was shameful and exposed how “the swamp” is still very much in control. As a small business owner, my health care premium is set to spike to a new all-time high for 2018. Am I steamed over this broken promise? You bet.
It is kind of a miracle that the market doesn’t correct on the complete ineptitude of Congress when these elected officials fail to perform even at the lowest levels of expectation. Because the $19 trillion U.S. economy is too big for even the politicians to derail, it and the stock market thankfully take all the political garbage in stride and power forward. The past decade of recovery has this aircraft carrier of an economy running full speed ahead.
It takes five miles to get a Nimitz-class supercarrier, such as the recently activated U.S.S. Gerald Ford, up to its full speed of 30 knots and five miles to bring it to a full stop. One could think of the U.S. economy in the same manner. America’s economy is just getting up to cruising speed and it will be some time before any adverse forces can create some meaningful headwinds that could derail growth or more record gains for stocks.
President Trump may want to talk up the stock market at his press conferences, but other than banging his own drum and cheerleading, he hasn’t contributed any tangible stimulus to the bull trend. Again, this is my view. What I do know is that from my long experience in the world of high-yield asset investing, the following high-yield sectors are set to continue winning for investors in the months ahead, based on my analysis of where the best income and growth sectors will outperform for 2018. I like:
- Blue-chip stocks with rapidly growing dividend payouts
- Floating-rate preferred debt and floating-rate business development companies (BDCs)
- Hotel real estate investment trusts (REITs), gaming REITs, data center and cell tower REITs, industrial REITs
- Short-term corporate, convertible debt funds
- Private equity firms
- Covered-call, closed-end funds with emphasis on technology
- Liquefied Natural Gas (LNG) master limited partnerships (MLPs)
- Select gas pipeline/transfer/storage/logistics and refining MLPs
As I noted, when rates are moving lower, everything under the sun that has a yield is operating like clockwork, and you can take a shotgun approach to spreading around your capital dedicated for income. However, when interest rates start to rise, the field of rate-sensitive choices greatly narrows and selectivity comes at a premium — you have to hunt for yield with a deer rifle. It becomes much more difficult to find yields of 5-10% that will also grow principle. Plain and simple.
My high-yield advisory service Cash Machine is where investors can find those coveted assets that do sport fantastic yields and foster capital appreciation. Click here to find out how your income portfolio is best served. We are in a bull market and rates are going to grind higher in the year ahead. That’s my prediction, and President Trump and Congress will have little, if anything, to do with that outcome.