Market Digest – Week Ending 12/4
Stocks finished the week little changed, but there was intra-week volatility. Indexes dropped Wednesday and Thursday, primarily because stimulus measures from the European Central Bank fell short of expectations. Most of the gains were recouped on Friday after a strong US jobs report and comments by the ECB that more stimulus could be coming. An OPEC meeting Friday did not result in any output reductions. Oil fell, with West Texas oil prices now below $40 per barrel for the first time since 2009. The Euro regained 2.5% relative to the dollar.
S&P 500: 2,092 (+0.1%)
FTSE All-World ex-US: (-0.1%)
US 10 Year Treasury Yield: 2.27% (+0.05%)
Gold: $1,087 (+2.6%)
USD/EUR: $1.060 (+2.5%)
• Tuesday – New auto sales for November were reported ahead of expectations, putting the auto industry on track to challenge the 17.35 million yearly sales volume record set in 2000.
• Wednesday – A married couple killed 14 people in San Bernardino. The attack shows signs of radicalization and foreign inspiration, but so far not direct links to terrorist organizations have been established.
• Thursday – The ECB dropped its interest rates on deposits to -0.3% and extended the existing bond purchase plan. The moves were not as dramatic as expected. Stocks fell and the Euro rose.
• Friday – OPEC members failed to agree to production cuts. Oil fell.
• Friday – US employers added more jobs than forecast, increasing the likelihood that the Fed raises interest rates in December. Stocks rose.
• Friday – Chipotle reported cases of E. Coli in new states and said its sales targets may be impacted. Shares fell.
Kinder Morgan fell 30% this week. While no longer technically an MLP (Master Limited Partnership), it is widely held among income seeking investors. Despite an almost certain interest rate hike next month, yields on bonds should remain very low for a long time to come. This has put income seeking investors in a tough spot. Many, seeking respectable yields, have piled into high yield assets. The major classes are lower quality corporate bonds, high dividend stocks, REITs, MLPs and Preferred Stocks.
This year, it hasn’t been pretty. Even after the coupon payments, high yield corporate bonds are down around 4%. High dividend US stocks have a slight positive return for the year, but are trailing the overall market modestly. REITs are about flat. The largest MLP ETF has lost around 30% for the year. Kinder Morgan has lost about half its value. Preferred stocks are doing ok, up about 5% after yield.
If diversified among all of these, 2015 could be viewed as a challenging, but tolerable year. But many investors ended up concentrated in the worst areas. Income doesn’t matter if the underlying price drops 25%. We are big believers in constructing portfolios designed to provide the best expected total return for the expected amount of risk. Usually, that comes from a combination of growth securities and income producing securities.
All that matters is how much money you can spend after taxes. Yield is just one part of that.