Time for TINA

The post-BREXIT surge has taken the accounts we manage to all-time highs. The last month in particular has added a few more percent to the already good returns we’ve seen this year (actual return depends on portfolio).

Rather than celebrate this fact we’re viewing this increase with skepticism. Stock prices are high, corporate profits are falling, and the world seems to be tearing apart at the seams. Meanwhile the S&P 500 powers higher in a relentless incline.Time for TINA

What’s interesting about this market is the lack of starry-eyed optimists buying stocks with reckless abandon. No, the media reports this is “the most hated bull (up) market ever,” meaning everyone is skeptical. But what other alternative is there for the investors? Josh Peters, CFA from Morningstar, and others say, “There Is No Alternative (TINA)” to stocks. Let’s review why that might be the case:

Banks – Most certificates of deposit are paying less than 1% and to get 2% you have to lock your money up for 7-10 years. Money market accounts are stuck at less than 1%.

Annuities – Guarantees are low and lock-ups are long, similar to CDs. Fees are extraordinarily high (often 3%+ per year) for most variable and indexed annuities offering income riders.

Bonds – Rates are as low as they’ve ever been. The US is actually a high paying country, paying 1.5% per year for 10 years. Other government debt like German, Swiss, and Japanese bonds offer NEGATIVE rates, meaning you pay them to hold your money… seriously. Investment-grade corporate debt is following the same trend offering very low rates.

Real Estate – A great place to invest in our opinion, but valuations are now looking a little like irrational exuberance. There is still opportunity here for the selective buyer, but significantly more hassle and maintenance than buying a stock or bond.

Now compare those choices to the stock market of a country that’s growing at 2% per year. Admittedly that’s hardly roaring, but it’s still solid growth compared to the rest of the developed world and the S&P 500 is a mere 3% overvalued by Morningstar’s calculations. Not quite a bubble.

Drilling down further, the 26 stocks in the income portfolio we follow produce over 4% per year in dividends, has gained 9.9% total return (dividends and growth) per year for the last 10 years, is approximately 30% less volatile than the stock market, and appears to be only 6% overvalued (again according to Morningstar’s analysis). Now is the time for me to say past performance is no guarantee of future performance and these returns are before our fees.

It’s no wonder people continue to pile into the stock market given the other choices. The important thing to remember (like in real estate and any investment really) is to be selective. Not all stocks are equal and as you can probably tell, we use Morningstar to help us with that.

With that in mind, we just made a change to the portfolio on Morningstar’s recommendation. Chevron CVX has been a position we’ve held for quite some time and just yesterday we sold. Chevron took a beating last year due to low oil prices dropping to $75 per share at its low. We were confident they could weather the storm and as their share price came back up to $105.24 yesterday, we sold in all accounts.

While we still think Chevron is one of the best energy companies in the world, it doesn’t look like they’ll be able to grow their dividend like they have in the past with oil prices staying below $50 per barrel. For that reason we sold and will look to reinvest those proceeds when the market pulls back, or when we find another company who’ll be able to raise their dividend consistently in the future.

Thanks for taking the time to read. Please call or email with any questions.

-Tim Porter, CFP®