Stocks moved modestly higher on the week with most of the major equity indices hitting new records. Investors continue to focus on the long-end of the treasury curve with eyes firmly on the 10-yr yield. On days when the yield rose, the Nasdaq took a hit. On days when the yield fell, the Nasdaq rallied.
Small caps continue to power higher. Most of my new equity purchases (accumulation phase) are going into small cap value to bolster my allocation there. I will be posting an idea on that on Monday.
The S&P 500 is now up 5% YTD with the Nasdaq up 3.3% and the Russell 2000 (small caps) up almost 19%.
The key events on the week was the 10-yr and 30-yr auctions as well as the release of the February inflation numbers. The Labor Dept reported that Core inflation rose only 0.1%, below expectations of 0.2%. This mitigated investor fears of runaway inflation for all of a day.
Consumer sentiment hit a 1-year high thanks to progress against the virus and the re-opening of several states.
Muni debt rallied all last week despite higher yields thanks to the support the space is receiving from the Stimulus Bill. Money flowed into the space as the bill provides significant relief for state and local governments.
Below are the areas of the equity market that are performing well this year. I will be doing some updates in that area including some ideas for your equity allocation.
Discounts continue to tighten up. They are now tighter than they were just before Covid hit. There's not much to buy. As I've noted investors have a BIG DILEMMA here. Do you sell and rotate into OEFs/ETFs in an effort to stave off discount blowouts? Or do you just hold and focus on the income streams. Or some combination of the two. I'm definitely in the middle there.
As I've stated a few times, I've taken down my global CEF allocation bigly in the last month as these discounts have tightened. Most of that reduction came from my high yield bucket which I believe to contain little in the way of upside here. Discounts have tightened among high yield funds and spreads in HY have tightened up to pre-Covid levels. All downside in the space but the question is, as always, timing. We can be in this state for a long time. Selling means you reduce your cash flows.
The chart below shows the taxable fixed income CEF space. You can see discounts have been tighter in 29% of instances. Most of those were pre-2015 (the last time they were tighter was 2012-2013).
Given this, I'm preferring to take some risk off the table and focus my efforts on special situations and term funds. For instance, the Eaton Vance funds that have not received enough votes on the new investment advisory agreement could be a place to go. I added a few hundred shares of EFR on the back of the news that EFF will liquidate after having not being able to secure enough votes for the new agreement.
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