Eq: Large Cap
It should not be this easy to beat the Dow, but it is. In the last ten years, investors could have used a very simple strategy to outperform the index by a significant level. The strategy is called “Dogs of the Dow”, which is the method of buying the ten highest yielding stocks in the Dow. Over the last decade, the strategy outperformed the index in 7 years and overall outpaced the Dow by 1.7% per year, returning an average of 15% per year for a decade. It also outperformed the S&P 500 considerably.
FINSUM: Who sad value investing is dead? This is a classic strategy that has worked to great effect.
The best thing an investor can do right now is to ignore all the market predictions being released for 2020. Every research department has to put out a prediction, and most of them are not worth the paper they are written on. So what does one do? Invest in dividend stocks. It is an important but preciously little known fact that the lowly dividend has historically accounted for 45% of all stock market returns. They are also tangible and predictable in a way stock prices are not, giving them a crucial place in a portfolio.
FINSUM: An additional stimulus for dividend stocks is that the aging population is hungry for them since bond yields are so anemic. Check out AT&T at 5.3%.
The media is currently doing its level best to scare junk bond investors. There have been many analyst and media warnings lately about the pending fall of high yield bonds (some of which we have featured). Most argue that in an economic downturn, BBB bonds will suffer. Others says there has been no rise in underlying performance to justify the rise in prices. Others have focused on CCCs and their movements. Initially the worry was that CCCs had not rallied like the rest of the market, which was taken as a sign of deteriorating credit conditions. Now the media is warning (see Barron’s) that since they have rallied, it is again a warning sign.
FINSUM: Everything is a warning sign! Our own feeling is that we are generally moving toward a more risk-on environment and the trend for high yield is improving as the economic outlook does.
One of the biggest ratings agencies on Wall Street has just put out a stern warning on the junk bond market. Moody’s says that high yield debt may fall “significantly” after a big rally this year. In a quote that captures the general disbelief that has accompanied the junk bond rally this year, Moody’s economist John Lonski says ““High-yield bonds have rallied mightily despite the lack of any observable broad-based acceleration of either business sales or corporate earnings”. Moody’s thinks that if performance of the underlying companies in the space does not improve, then there will be a reckoning, saying ““If the anticipated improvement in the fundamentals governing corporate credit quality do not materialise, a significant widening of high-yield bond spreads is likely”.
FINSUM: Irrational exuberance?
The Dow gets a lot of intention in the media, but in the investing world it is relatively rare to see Dow-tracking products compared to those linked to the S&P 500. This has led to a general perception of the Dow being old-fashioned and not particularly suitable for investment because of its odd weighting system. But not so fast (!), over the last five years the Dow has actually outperformed the S&P, and in the last ten it barely trails.
FINSUM: This is quite an interesting finding considering how the Dow is generally treated. If you want to play the Dow, check out the SPDR Dow Jones Industrial Average ETF Trust.
There are some very worrying signals coming out of the high yield sector. In particular, stocks at the riskiest end of the market have been underperforming. Bonds rated CCC, CCC+, and CCC-, which are the three lowest rungs before default, have been underperforming all year and that weakness has now reached an “unprecedented size”. What is worrying is that very lowly rated bonds are usually the most influenced by economic perceptions, and it is unusual that with junk rallying so much this year that this cohort has not taken part.
FINSUM: So there are two options for what this could mean. Either it means investors are just being cautious, or much more negatively, that credit conditions are tightening, which would be a sign of a pending economic downturn.