To Rodney’s point, even though the economy is a far cry from healed, many investors are still pouring money into the market… and pulling a lot of profits from it, as well.
Stock market investing was easy in the ’80s and ’90s as Baby-Boomer consumer demand kept the economy humming along. Yet, in the past decade, the stock market’s wild swings, combined with stall-speed economic growth, has led investors to other sources of profits.
In short, a low-growth economic environment makes successful investing more difficult because you can’t rely on a rising tide to lift all boats.
With interest rates pinned to the floor, the legion of bond investors who were taught to keep a 60:40 portfolio of stocks-to-bonds has had no hope of earning a yield that, at a minimum, matches inflation. So yield investors turned to other sources of income, like high-yield junk bonds and real estate investment trusts (REITs).
Here at Dent Research, we too have worked hard to find the very best sources of yield. Yet, unlike some teetotalers who have invested exclusively in high-yield vehicles, we didn’t give up on the stock market.
This chart of year-to-date returns shows that was a great decision.
As much as we have concerns about economic growth and a long list of potential meltdown triggers, we’ve long known that it doesn’t pay to fight the Fed. And like it or not, the Fed’s liquidity program has benefitted stocks more than any other asset class.
You’ll see above that while REITs started 2013 with a bang, concern over Fed tapering – which first hit the market in May – was enough to put a damper on the performance of REITs for the rest of the year. They are up just 2.5% year-to-date, after gaining nearly 20% into May.
Likewise, junk bonds have done little for investors this year. Sure, junk bonds and bond funds pay a great yield – about 4.4 percentage points more than stocks pay in dividends – but price appreciation has been nonexistent this year. The popular junk bond fund, JNK, is down about 1% this year.
We’ll continue to look for the very best yield plays for you. But remember, yield is only half the battle in building a strong, well-balanced portfolio. Price appreciation is still paramount… and for now, stocks are providing that in spades.
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