Market Pulse: Previewing the 2019 market: Part II
January 24, 2019
Stocks are currently trading at 15 times expected earnings so they are neither expensive nor cheap.
For that reason many expect stock returns this year to be in the mid-single digits. I expect more. Here's why:
A recent MarketWatch article showed how the S&P fared after bad quarters such as the one just ended, which at the time of the writing in late December was the S&P's 14th worst ever. A buying opportunity? If history is any guide, absolutely.
Look at the 13 quarters that were worse. On average, one year later stocks were up 25.6 percent, after three years they were ahead 37.9 percent, and after five years they gained 91 percent. Your emotions may say otherwise, but better buying opportunities come amid market weakness.
If you are nervous about buying but want to participate, consider ProShares S&P 500 Dividend Aristocrat ETF (NOBL) or Invesco Low Volatility ETF (SPLV).
In the fixed-income space there was a "flight to quality" that sent Treasury yields lower. After the high on the 10-year Treasury hit 3.25 percent, the yield currently is 2.72 percent.
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Not all fixed-income asset classes benefited from the flight to quality. Two that suffered during the fourth quarter were corporate bonds (both investment-grade and high-yield) and preferreds. They have since recovered some.
Because of their yield, any round of selling quickly makes preferred stocks more attractive. The number of investment grade preferred stocks trading below their $25 par value reached a five-year high with an average yield of just over 6 percent.
Yields on lesser quality issues rose to 7.5 percent. Those yields in a slowing but growing economy look attractive to me.
Utility stocks would normally do well in such an environment, but investors are skittish after the PG&E possible bankruptcy.
Instead, income investors are turning to pipeline stocks like Kinder Morgan (KMI) and Enbridge Inc. (ENB). These aren't normally thought of as utilities, but they should be as a steady amount of oil and gas flows through their pipelines each month. KMI yields 4.6 percent and ENB yields 6.2 percent. They are attractive.
Bottom line: Don't be concerned about volatile swings in the overall market. Selling when prices are down and buying after they recover is disastrous. We've seen this volatility before, we'll see it again. It's still a bull market.
Our focus on earnings, the outlook and dividend payers (and raisers) with relatively high yields will serve us well as it has for many years.
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 advisor before purchasing any security.