It’s all about the U.S. economy when it comes to the markets right now. Global growth is slowing. Major economies in Europe, Asia and more are all slowing, headed into recession, are in recession or worse. Most major stock indexes in U.S. dollar terms continue to trail the S&P 500 Index in price and total returns.
And in the bond markets, the U.S. is the destination of choice for investment, with over $14 trillion of bonds in Europe and Asia with negative yields. The U.S. continues to offer more attractive bond yields for Treasuries, corporates, municipals and other bonds. Add in the low-to-lower U.S. inflation as measured by the core Personal Consumption Expenditure Index (PCE) sitting at a mere 1.77%, and U.S. bonds look even more attractive.
Troubling Economic Data
But the U.S. economy is not all milk and honey. Trade negotiations are showing glimmers of easing with various nations including China, Japan, Canada and Mexico, but uncertainty persists. This is evident by the whipsawing of U.S. stock markets last week and, so far, this week. One day traders are in a mania of optimism over China talks. The next they plunge into depression over prospects of talks collapsing. This is no way to provide certainty for individual investors.
And last week, we had discussions over indicators of business sentiment for manufacturing and non-manufacturing in the Purchasing Managers Indexes (PMIs). And they are another manic/depressive input for the stock market with the glass half-empty battling the glass half-full traders and prognosticators.
Two PMIs for manufacturing were released. Both show drops over the past 12 months. You have been hearing about this as bad news for the economy until you get the inside scoop.
Markit PMI Manufacturing (White) ISM (Gold) Indexes Source Markit, ISM & Bloomberg
The ISM number is 47.80 which is below 50 and suggests a slowing in manufacturing activities and expectations. But the Markit number is 51.10. That’s above 50 and actually higher than the previous month, showing improving optimism. The divergence is explained by Markit to me that the ISM has a greater focus on larger and more globally focused manufacturers which are being more impacted by global slowdowns or recessions.
This matches up with the realities that the U.S. remains in growth mode while the world slumps, as I’ve been discussing in my Profitable Investing.
Looking Deeper Into the Numbers for SAfe Stocks
But taking a step further back, manufacturing is a very small sector of the US economy and is dwarfed by services and non-manufacturing. And we got a snapshot on these sectors PMIs from Markit Services and ISM non-manufacturing indexes which were released today.
Markit Services (White) & ISM Non-Manufacturing (Gold) PMI Indexes Source Markit, ISM & Bloomberg
Both PMIs remain in positive territory (above 50) but are lower than they were in 2017-2018.
But another view directly on consumers also came in late last week in the Bloomberg Consumer Comfy Index.
Bloomberg Consumer Comfy Index Source Bloomberg
This shows an upturn to 62 for the latest weekly survey results which includes lots of disconcerting news on the US economy including the General Motors (NYSE:GM) strike. This means that for now, the biggest component of the U.S. economy — consumer spending — should remain a positive for a while longer.
Of course, we also had Jobs Friday last week. The employment data showed both arguments for further growth and slipping progress. But my take was that the jobs number was good, including the two-month revision. Participation was also good, along with the underemployment rate. And wages are still climbing — but with perhaps less inflationary pressures. Again, pretty good.
All of this shows both some things to be concerned about and some to take comfort in for stock investors. And many U.S.-focused industries and companies are faring better in their businesses and in the stock market than globally focused peers. This is why I have continued to focus my recommendations on the U.S. sectors for now.
But then we come to the credit markets. The U.S. credit markets have been squeezed, causing some near-term challenges. This is in the very short-term funding market in the repurchase agreements (Repo) market. This came with regulation-strangled major banks not participating as they did many years ago along with a slew of U.S. Treasury bond sales taking cash out of the credit markets
This is being finally addressed by the Fed as it resumes a form of Quantitative Easing (QE) by providing Repo transactions daily amounting to $75 billion and discussions of resumed bond buying. And in turn, U.S. bonds are gaining in price. But a lot more is now riding on the next Federal Reserve Bank Open Market Committee (FOMC) meetings on Oct. 29-30.
REITs & Utilities, Along with a Gold Lining
Real estate investment trusts (REITs) and utilities continue to deliver gains which have been holding up even on troubled general stock market days. This has been the trend during past downturns, including the big and sustained one for the fourth quarter of 2018. And dividend income remains attractive with REITs adding the tax benefit of the 20% tax deduction from dividend income as part of the Tax Cuts & Jobs Act of 2017 (TCJA).
There are two utility investments to focus on. The indexed equity play is with the Vanguard Utilities ETF (NYSEARCA:VPU). This ETF has returned 23% year to date and provides a yield of 2.8%.
The second is an individual utility, NextEra Energy (NYSE:NEE). This utility has regular power operations in Florida and has unregulated wind and solar operations throughout North America. The stock has delivered a return of 32.07% year to date and yields 2.22%.
And gold, something that I first began to recommend earlier this year, is now the go-to market for downturns. It can also help with capitalizing on lower U.S. interest rates. But rather than bullion or the SPDR Gold Trust ETF (NYSEARCA:GLD), go with the royalty company, Franco-Nevada (NYSE:FNV) which continues to vastly outperform spot gold and the GLD.
Bonds, Buy ‘Em
While there was a glitch in the liquidity in the credit markets discussed above, U.S. bonds remain great performers year to date. In the Profitable Investing model portfolios, I have a collection of funds, individual preferred stocks, individual mini-corporate bonds and well-performing closed-end municipal bond funds.
In particular, look at the BlackRock Credit Allocation Income Trust (NYSE:BTZ). This closed-end fund has a great collection of bonds which has the fund’s stock price trading at a big discount to the net asset value (NAV) of the bond portfolio by 9.41%. That’s a big bargain right now. And it yields 7.4%, making for a further great buy.
Now I’ve presented my recommendations for risk-off stocks and alternatives for volatile or down markets, perhaps you might like to see more of my market research and recommendations for further safer growth and bigger reliable income. For more – look at my Profitable Investing. Click here to learn more:
In addition, I have recently had a book published titled Income for Life. For more information on it, click here:
It is nearly 400 pages of income producing investment strategies for all weather economic conditions as well as additional income producing ideas that anyone can use successfully.
Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine…one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.