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Trade Risk, Market Fundamentals and What to Buy to Defend

May 30, 2019

US stocks are still up for the year—the S&P 500 Index is up 10.91%. In addition, the corporate bond market is up 6.59%, and the municipal bond market is up by 4.40%.

The US dollar remains stronger this year, up 2.44% from January, adding to last year’s gains.

And the underlying economy continues to be conducive for stocks. Consumer confidence is firmly higher. This supports the view that households’ personal financial conditions and outlooks are positive. This should support further spending, which drives revenues for successful US companies.

 Bloomberg Consumer Comfort Index—Source: Bloomberg Finance, L.P.

With consumers comfy, it’s also providing the incentive for companies to plan for major capital expenditures to build and expand their businesses. That movement can be seen in the recent gains in the US Business Leaders Future Capital Spending Survey, conducted by the Federal Reserve Bank of New York.

US Business Leaders Future Capital Spending Survey—Source: Federal Reserve and Bloomberg Finance, L.P.

This is all very good for the prospects for businesses and, in turn, for the stocks of publicly listed companies.

But what is extra compelling are the more domestic-focused US companies. Real estate investment trusts (REITs) saw earnings gains of 6.94% for the latest quarter, and utilities reported earnings gains of 5.37%.

Healthcare companies reported earnings gains of 9.09%—all multiples of the average earnings gains for the first quarter. That’s why I’m focused on these “Buy American” stocks.

Trade Risk and Support

Trade tensions have increased volatility, but the key threat is a rout like we saw in the fourth quarter of last year, when selling begat selling, as hot money left the stock market.

But that isn’t a big concern here. Money flows into US stocks via funds have been negative year to date. This indicates there’s less hot cash in this market, so there’s less hot money to potentially leave it.

The opposite has been the case for bonds this year. This suggests that there’s further confidence in the credit conditions of the bond market as well as low to no inflation concerns. This supports lower corporate borrowing costs, which helps earnings and provides incentives for companies to borrow to further invest in their companies.

Also, lower yields in bonds makes a risk/reward calculation between bonds and stocks more compelling for stocks, since stock dividend yields are in line with—if not higher than—many sectors of the bond market.

So, expect further volatility and some down days in coming weeks. And to be defensive, focus on my “Buy American” picks that are more insulated.

Packaged to Profit

“Buy American” is my defensive theme right now in light of trade troubles and for reliable dividend flows. To start, let me suggest some key exchange-traded funds (ETFs) that synthetically provide exposure to some of the best of the best American sectors.

I’ll start with REITs. US REITs offer plenty of tax-advantaged dividends from primarily American properties. And the best in this ETF space is found in the Vanguard Real Estate ETF (VNQ). The ETF pays an annualized dividend yielding 4.01% and has generated a year-to-date return of 17.75%.

Then on to utilities. US utilities offer dividend income from both regulated and unregulated essential services. One of the best is found in the Vanguard Utilities ETF (VPU). It yields an annual rate running at 3.03% and has generated a year-to-date return of 11.91%.

On the US bond front, corporates and munis offer great income with further gains in the works thanks to the inflow of cash both from investors inside the US and from abroad. For US corporate bonds, look at the SPDR Bloomberg Barclays Intermediate-Term Corporate Bond ETF (SPIB), which yields 3.26% and has generated a year-to-date return of 5.03%.

And for munis, look at the SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (TFI), which yields a tax-advantaged rate of 2.18% and has generated a year-to-date return of 4.60%.

Below are the total return figures for each of these packaged ETFs, showing their progress so far this year:

Vanguard Real Estate ETF & Utilities ETF & SPDR Corporate Bond ETF & Muni ETF Total Return Year to Date—Source: Bloomberg Finance, L.P.

Aside from my “Buy American” picks, I have even more opportunities with extra income that you can read about in my Profitable Investing advisory.

Click here now to learn more.