Maybe Boring is Gone – Maybe
By: Tim McPartland,
July 6, 2014 11 pm
Only a week ago we lamented the markets had reached the pinnicle of boring–of course we knew that this would not last, and it didn’t.
The employment numbers released on Thursday were very bullish for equities while being bearish for income issues (of course it was just last year that a number like this would have sent the stock market into a sharp tailspin as interest rates rose). Now equity owners don’t care if interest rates tick higher (at least yet)—it is the rate of rise that will determine whether equities react and a 3 day rise of 13 basis points is not a real scary number. We believe that rates may drift back lower again now–it depends on what kind of follow up economic numbers we receive in the weeks ahead.
What did we see in the income markets? Preferreds and exchange traded debt came off less than 1/4 % from their recent all time highs, MLPs and REITs were off about 1% for the week–while Closed End Funds (CEFs) of income issues (Preferreds, MLPs, and REITs) were off closer to 1%–holders of Preferred Stock CEFs seem to be a much jumpier bunch than holders of individual issues.
Honestly as we look at the economic numbers released recently they give us a twinge of bullishness toward equities. This worries us as we would prefer to feel (mentally) very neutral. We do not want to feel like we should pile into equities–that is for the other folks–we want to be slow and steady and executing on our plans. We have a goal of 7% for the year and 7, 8 or 9% is just fine for us–regardless of how equities perform. Our current hope is that we will stay in boring markets, but if rates have to rise we are quite fine with the 10 year treasury rising 5 or 10 basis points a month through the balance of the year and we don’t think this would appreciably harm income issues. Of course any rate rise is harmful, but it is noted that all the losses that were incurred last summer when the 10 year treasury rose by over a full point have been recovered. Now if we were to get a massive, quick rise of say 50 basis points there would no doubt painful damage to income issues, but history shows they may be recovered over time (even without lower rates).
So in the face of rising rates what do we do? We change nothing–now. We have moved some money to shorter maturity issues while unloading some ‘pertpetuals’. We have reviewed our holdings for potential issues that could be called and have found no action to take. We think this market is likely to be ‘boring’ more than it will be ‘exciting’ and this suits us fine. We are more concerned with global events that are not predictable–i.e. terrorist events etc., but we are not going to lay awake nights worrying about ‘what ifs’. ‘What ifs’ have been around as long as the marketplace and we have all survived and we suspect that will continue.