The environment we find ourselves currently in has laid crown to the Paula Abdul crowd, namely, “three steps forward and two steps back”, when it comes to market direction and economic data. One in which we feel good, things look good and it appears we are about to turn the corner on a number of fronts only to get banana peeled by a weak jobless claims report. This can frustrate many an ADHD afflicted investor prevalent in the market today. One requiring instant gratification or he/she loses interest.
It may be time to crown a new king today, Howie Day for “we finally find you and I collide”. I’ve butted heads with many growth managers and income investors over the years. They’ve all staked out their turf and refused to cede the high ground. Today I ask, can’t we all just get along? Consider where we are today and how the future is shaping up. We will remain in a below trend growth economy most likely for the next few years. We are transitioning the economy from being heavily reliant upon the consumer and domestic consumption to one propelled by our ability to export goods and services. Our construction and homebuilding sector is realigning to more fully balance the overabundant supply vs. demand. The Federal Reserve will continue challenging their own hypothesis and running fiscal experiments, not in a vacuum or in a Petri dish, but real time in the economy. So, zero interest rates and Quantitative Easing are most likely here much, much longer than anyone had/has anticipated, including myself.
In a period of stubbornly high unemployment, with treasury yields verging on ridiculous and corporate top line revenue growth about to be challenged, how do we manage growth in a portfolio? We can continue sifting through a given days carnage searching for the pearls and look to buck the overall trendless direction of the market for a modicum of growth. When the market is churning about while moving nominally higher like it has, most equities should have an attractive accompanying dividend yield (close to 3% today) to boost returns. We could add in a sprinkle of some treasury bonds. However, I refuse to be cannon fodder AGAIN, when the hedge funds and PIMCO decide to head for the exits at the first glimpse they’re influence is waning in Washington and decide 2 ½% 10 year treasuries are no longer attractive. No! Here is where Growth and Income investors collide. Obtaining Growth through High Yield, but not via High Yield. Boy, I almost feel a bit Greenspan-esque with that one. If you understood what I said, I wasn’t properly obfuscative. High Yield is a term generally associated with junk bonds, or another way of saying it is, for companies with ratings below investment grade. In today’s market and with risk aversion still quite high among investors, perfectly good companies are being forced to pay 7 ½%, 8% and 9% to entice lenders and investors. Government backstopped banks like Bank of America and Wells Fargo. Basic utility companies such as PPL and National Grid come immediately to mind. So, in this low growth environment where equities may produce 3-6% capital appreciation injecting 7-9% in dividends make for pretty healthy total returns.
I’ll continue monitoring the economic data and studying the charts for any signs we are in something more than simply a trading range.
In a note of full disclosure I may own or look purchase in the future shares of WFC, BAC, PPL and NGG. Before making any investment decisions on the companies mentioned here, please do you own due diligence, contact your investment professional or contact me directly at Grand Street Advisors, 816-510-9897.
Have a terrific day!
Disclosure: PPL-U, PPL, NGG, BAC, WFC