This year’s narrow equity market rally combined with declining bond prices have created a wealth of opportunities for patient investors. Our cautious economic and financial market views have our Strategies biased towards defensive, high-quality equity and fixed income sectors that are also relatively inexpensive. We have been finding more and more opportunities to increase the current yield and potential total return for our investors.
In fact, many of these dividend paying stocks have seen their share prices decline while their earnings have increased. As exhibit 1 suggests, the S&P 500 Index is currently trading at a premium relative to its price-to-earnings valuation over the last 10 years. Meanwhile, the S&P 500 Dividend Index is trading at an 11% discount.
The CMBS market is represented by many different property classes including but not limited to apartments, hotels, office, industrial, and retail (Exhibit 2). Additionally, the CMBS market consists of both government agency and non-agency issued bonds just like the residential mortgage-backed securities sector.
With higher interest rates and declining occupancy rates, there have been many ratings downgrades in the CMBS market this year, which is not surprising as delinquency rates have increased for some property types.
According to the Mortgage Bankers Association, office and retail are seeing the bulk of the rises in delinquencies, while property types with more stable cash flows, such as multifamily and industrial, are doing well. At the same time, spreads have widened for CMBS, making the sector attractive relative to its ten-year average.
This scenario has led to volatility in the CMBS market and created opportunities for active managers that can add value through sector and security selection. With nearly 50% of the outstanding CMBS falling into the office and retail space, using an actively managed product for CMBS exposure can help mitigate risk. The flexibility of active bets within the portfolio allows for tilts to stronger performing sectors and securities that offer value. We believe the addition of actively managed CMBS exposure can help diversify a fixed income allocation and provide an attractive yield with less interest rate risk.
At this point, our Strategies offer significantly higher yields than their respective benchmarks. The combination of equity income strategies as well as diversified short-term and intermediate term fixed income has increased current yield while locking in intermediate-duration income for longer as well as setting up to capture increasing dividend payments over time.
During bouts of economic distress, central banks generally cut interest rates quickly to loosen monetary conditions and stabilize economic activity.
Investors overallocated to money markets and T-Bills would see their interest income decline quickly. Meanwhile, investors in intermediate-duration fixed income would experience little or no change in their current income while also potentially benefiting from capital appreciation as falling interest rates drive bond prices higher.
These attractive current valuations are likely going to lead to appealing investment results in the future while also potentially reducing current economic and market risks in our view. We think that these changes better prepare our Strategies for potential geopolitical and interest rate risks ahead while offering attractive yield and capital appreciation potential.
The Cash Indicator (CI) has begun to elevate off recent extreme lows. While the CI remains below its historical median level, financial markets seem to be less complacent currently. We see this as a healthy development. Still, readings this low have historically been followed by increased volatility. We remain defensively positioned and prepared to take advantage of opportunities as they emerge.
Any forecasts, figures, opinions or investment techniques and strategies explained are Stringer Asset Management, LLC’s as of the date of publication. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect to error or omission is accepted. They are subject to change without reference or notification. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to support an investment decision. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested.
Past performance and yield may not be a reliable guide to future performance. Current performance may be higher or lower than the performance quoted.
The securities identified and described may not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.
Data is provided by various sources and prepared by Stringer Asset Management, LLC and has not been verified or audited by an independent accountant.
S&P 500 Index – This Index is a capitalization-weighted index of 500 stocks. The Index is designed to measure performance of a broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
S&P 500 Dividend Aristocrats Index – This Index tracks companies within the S&P 500 Index that have a record of raising their dividends for at least 25 consecutive years. Each company is equally weighted within the Index. S&P will remove companies from the Index when they fail to increase dividend payments from the previous year. The Index’s universe includes stocks with a float-adjusted market capitalization of at least $3 billion and an average daily trading volume of at least $5 million, in addition to consistently increasing dividend payments. The index requires a minimum of 40 companies.
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