Looking at the stock market, it appears that things are getting back to better — and then some — for the U.S. economy. The S&P 500 index has returned 39.15% since March 23 as the stock market re-engaged with buy orders on the back of massive Federal Reserve buying of nearly everything in the credit markets as well as parts of the stock market. And of course, the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES) along with additional aid from the Administration via the U.S. Treasury only added to the bullish sentiment.
And the S&P 500 Index is also now positive in return for the trailing year by 7.97%, proving that having a perspective to work through and look through even the most dire of challenges does have its rewards.
The same, of course, was the case in the fourth quarter of 2018. For completely different reasons, that quarter saw the S&P 500 plunge until Christmas Eve. Massive further aid, again by the Federal Reserve, turned a price plunge in the index of 19.32% into a return through year end 2019 of 40.24%.
And of course, the last major crisis stemming from the financial crisis of 2007-2008 saw the S&P 500 Index lose 56.78% from October 09 2007 through to March 09 2009 — again to be turned around by massive securities buying by the Federal Reserve resulting in a return through 2019 of 497.95%.
Bonds Bounding as Well
The U.S. bond market also has been performing exceedingly well. The Federal Reserve is buying just about every sort of bond, loan and credit security as well as bond ETFs. And the overall market, as tracked by the Bloomberg Barclay’s U.S. Aggregate Index (which looks at the entire bond market) saw a return since March 23 of 4.83%. That might not sound like much, but on an annual basis, it amounts to a return of 21.63% — which as a former bond trader and fund investor is absolutely huge.
And it gets even better for the types of bonds that I have been directing my subscribers to my Profitable Investing to be buying and owning both before and through the crisis. U.S. Corporate bonds have returned 16.58% for an annualized return of 88.98% and U.S. Municipal Bonds have returned 10.29% for an annualized 50.11%.
And of course, this follows in similar fashion for these markets as tracked by Bloomberg & Barclays post-2008 through the end of 2019, amounting to well-above-market returns for those who, back then, got on board with the Fed as well as fiscal assistance.
One bond fund that trades as a stock to buy right now is run by BlackRock (which of course is contracted by the Federal Reserve to buy the bonds and credit products and other financial assets). The BlackRock Credit Allocation Income Trust (NYSE:BTZ).
This is a closed-end bond fund in the U.S. corporate bond market that yields 7.33% and is a huge bargain as it trades below the net asset value (NAV) of its portfolio.
The fund has returned 45.18% since March 23 to date – but again, it’s still at a discount to NAV.
Not Just the Fed
OK, the Fed has been transformative for the U.S. economy and markets, both recently as well as in past crises of 2007-2008 and in 2018. But the economy has been doing its thing to improve enough to draw investor and trader interest in buying stocks and bonds since March.
Let’s start with the big turn in jobs. Weekly jobless claims just went absolutely scary — more so for those that were filing, but for investors too. The US Department of Labor saw the number of claims that are reported each Thursday hit a high of 6.9 million on March 27 from more of the usual level of 201 thousand at the end of January.
But with aid from the U.S. Treasury as well as legislative support from the CARES Act and the Fed, claims have been falling way, way down to the most recent level of 1.5 million. That is still a horrible number — but it shows improving bad news and not worsening bad news.
But the jobs data is getting not just less-worse, it’s actually getting better. The monthly jobs report by the U.S. Bureau of Labor Statistics (BLS) started to show cracks in the March report with a loss of 1.4 million jobs only to plunge horrifically to a loss of 20.7 million in April. But in the beginning of June with the May report it showed a gain of 2.5 million jobs.
This shows that as companies began to adapt to lockdown conditions, including capitalizing on remote work and stay-at-home technologies, household and other goods delivery as well as restarting assembly and manufacturing — jobs were coming back. And yes, there is still some wiggles on how some folks have been counted, including those who are considered employed if only furloughed — but the unemployment rate of 13.3% is way better than most people, including me, were unfortunately expecting.
And then I turn your attention to consumer spending — the core of the U.S. economy and the prime driver for business revenues. That is what will really support the U.S. stock market. U.S. retail sales as tracked by the U.S. Census Bureau began to quickly slide from February and March only to really plunge in April falling on a monthly basis by 14.7%. But in May — retail sales soared by 17.7%
And unlike retail sales for prior months that saw some buying of groceries and necessities for households in stay at home conditions — May saw buying across all sorts of goods, including clothing and other discretionary goods. This shows that consumers are spending with pent-up demand that may well continue into following months.
And as I discussed in the June issue of my Profitable Investing, while tragically millions lost jobs, the vast majority of the U.S. workforce were able to keep their jobs, and wages on average continue to rise strongly. This provides the means to spend. And savings have been soaring in the U.S. The average U.S. personal saving as a percentage of disposable income has gone from the multi-year average of 7.8% to a current level of 33.00%. And that savings has built up in bank balances, which is a now a massive amount of dry powder for further potential spending.
And there is more promise of consumer participation backed up with improving job market conditions and wages as well as savings. The Bloomberg Consumer Comfy Index is compiled by weekly survey results not just about how households are feeling now, but also how they view their prospects and that of the overall U.S. economy. This is a very important forward-looking index.
The Comfy Index plunged from all-time highs to lows not seen for a long time in mid-May at 34.7. But over the ensuing weeks from May 17 through last week it has continues to recover to a current level of 40.2, which is now above levels seen in 2015.
Businesses Getting Back to Business
It’s not just about consumers, as businesses need to produce and sell more goods and services. And that is also on the recovery. Monthly U.S. Industrial Production, which had cratered from February through a bottom in April at a low of a reduced 12.53%, has begun to bounce back. For May, it gained 1.39% — a huge recovery move for U.S. businesses.
This means that factories and assembly facilities as well as distribution centers all the way through to vendors and retailers including Amazon (NASDAQ:AMZN) in my model portfolios of Profitable Investing are moving more stuff and generating more revenues.
And like for consumers, I continue to monitor both current and forward-looking indexes for businesses in the U.S.. The choice indexes are done by the Federal Reserve Bank of New York in their business leaders indexes of C-Suite executives.
The index for current conditions of businesses around the U.S. hit the dire low in April at -94.3, only to climb in both May and now June to a level of -82.3. This is still terrible, but it does show the beginnings of a turnaround.
But what is more important is the outlook for six-months out. Here, the index again hit a low in April at -30.7, only to climb in May and further into June to a positive level of 24.8. That is now above levels seen in the fall of 2016. This means that businesses are not only expecting better times – but will be budgeting for more demand of their products and services.
Now, it is way too early to begin to make any sort of evidence-heavy forecast of sales and earnings for the companies inside the S&P 500 Index. The current second quarter results will begin to roll in during the weeks of July and into August and they will be messy for many companies. But the key to look at will be for companies that have enough confidence and data to begin to offer more guidance for the second half of the year. And that is what will begin to impact the daily up and down movements into the S&P 500 Index and individual stock prices.
Not Done Yet
But the big threat is still the Covid-19 virus. Unlockings have been underway around the entire U.S., to varying degrees — from stage 1 though stage 4 (4 means anything goes). But with the unlockings, the virus is rapidly increasing the numbers infected and deaths.
U.S. cases of the virus have surged to a current level of 2.3 million. But the really troubling data shows the net change rate on a daily basis which shows the sudden severity of the new cases which are now gaining at the most recent daily reported rate of an additional 33.9 thousand. This is now near the record highs of new daily cases seen in March and April.
This is a big risk for the economy and the markets. Relocking of state and local economies is a serious risk with many local authorities reversing lockdown easing and prohibiting some business operations and local individual activities. This is impacting even companies that are independently closing stores again in some areas of the U.S. including Apple (NASDAQ:AAPL).
And sports events are now being put in doubt, including Major League Baseball (MLB), which has seen suspension of training and practice facilities after a swift rise in tested cases. And even my beloved golf has seen the first player identified with the virus at The Heritage in Hilton Head, South Carolina.
This means that some of the heavy down trading days in the U.S. stock market in June may well occur in the coming weeks. I have done a lot of work on the status of the companies of the stocks inside the model portfolios of Profitable Investing which looks at how I see them getting through the virus mess and beyond including credit. And I still believe that they remain in reasonable to good shape overall even with some of the relockings.
Utilities
Since the low in the stock market in March, the primary sectors of our stocks are all up — many by more than the general S&P 500 Index. The S&P Utilities Index has returned 27.96%, which makes for more of a value as too many have taken near-term electricity demand drops in some markets as a harbinger of doom. But many power markets are actually faring well to higher. One of my favorite utilities is Xcel Energy (NASDAQ:XEL).
This is a company with both regulated and unregulated businesses around the U.S. And it has an ample and rising renewable energy capability, which makes it all the more attractive for ESG (Environmental, Social & Governance) investing which is bringing a lot of institutional investment into the company.
The utility has done well, with the total return since March to date running at 29.25%.
REITs
Then real estate investment trusts (REITs) have really delivered with a return of 40.41% as more investors have parsed-through REITs to discover that while retail is troubled — more REITs are better quality bets with ample rent collections.
One of the best buys in the REIT space is a company that’s not quite understood unless you actually look under the hood. Office Properties Trust (NYSE:OFC) looks like a sleepy office properties REIT, but there’s a lot more to it. It has mission-critical data center properties, particularly in Northern Virginia that tap into the strategic trunk lines for internet data transmission. It has a collection of properties that are exclusively done for Amazon and its web services and other core operations.
The company’s stock is doing well, with a total return from March to date of 47.57%.
Healthcare
Healthcare companies are doing well lately. There’s more focus on the needs for drug and vaccine developments now and in the future, as well as delayed procedures and treatments now taking place. The S&P Healthcare Index has returned 34.95%, which shows the way of this important sector in the market and the economy.
I have a collection of healthcare-related companies inside my model portfolios of Profitable Investing. But perhaps the best starting point right now would be a synthetic indexed play with the Vanguard Health Care ETF (NYSEARCA:VHT). This ETF has a great collection of companies that are all part of the solution for U.S. and global health.
The ETF has been surging in price, and with the dividends it has returned 38.9% since March 23.
Technology
But the continued big winning sector continues to be technology. Remote work and stay and home as well as ongoing developments all point to the higher future value of the alchemy of technology in the US. The S&P Information Technology Index reflects this with a return of 45.21%.
The go-to company in the technology space is Microsoft (NASDAQ:MSFT). I know that this stock is well known and followed, but it should be owned. It leads in cloud computing, communications, software and even electronic gaming.
The stock has been doing well for years, and since March 23 to date has returned 48.89%.
ESG, Seriously
There are some sectors that I really want you to focus on right now. And they span various industries and companies. Environmental, Social & Governance (ESG) focused companies have been gaining for some time. But this has been rapidly rising over the trailing year. And it isn’t just about being green or nice — but about profits.
I’ve been in this space with a collection of companies inside Profitable Investing, even as I’ve not much used the ESG tags for them. But what is further changing is the demand by institutional investor’s clients and beneficiaries for ESG investment that is pushing a wall of money away from non-ESG towards ESG companies.
One of my favorite ESG companies in the renewable energy space is Hannon Armstrong Sustainable Infrastructure Capital (NYSE:HASI). This is a financial company that for tax and dividend purposes is structured as a REIT. It provides financing to renewable energy projects — with a real kicker — as the deals come with government guarantees which provides a great backstop for shareholders. And it comes with a nice yield with tax advantages thanks to the Tax Cuts & Jobs Act of 2017 (TCJA).
The stock, with its higher-yielding dividend, has returned 57.97% from March 23 to date. But is still a cheap REIT with a lower price-to-intrinsic-value ratio than the sector.
The Helping Hand of Government
Then there’s the U.S. Government. The economic calamity in the U.S. has demonstrated the importance and reliability of companies that have major contracts and guarantees by the U.S. Federal and other governments. Government contracts are hard to lose and are reliable for companies to budget around for sustained revenues and profits. Like for ESG, I’ve been in plenty of companies with ample government contracts. They prove out during both tougher times and flush economic times.
One prime example is Easterly Government Properties (NYSE:DEA) which is a REIT with a major twist – its tenant is the U.S. Government. So, the economy tanks or soars — Uncle Sam makes the rent payments.
Easterly pays a nice dividend yielding 4.41%, and while not a huge performer since March, it is highly dependable.
All My Best,
Neil George
Editor, Profitable Investing & Income Investors Digest
Author, Income for Life
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.
