Wannan Yosinkum
As someone who primarily invests in interest rate-sensitive high-dividend stocks, the most frequent question I receive from other investors is when they think the Federal Reserve will cut interest rates.In this article, we will briefly explain I would like to reflect on how my portfolio has performed over the past 12 months in the face of interest rate headwinds and share my macroeconomic outlook over the next 12 months, particularly regarding whether and when the Fed will cut rates. Masu.
Looking back at the past 12 months
I have been fortunate to significantly outperform the S&P 500 (SPY) over the long term, but over the past 12 months since I started investing seriously about 15 years ago (right after the Great Financial Crisis). It was probably the most difficult period for my investment portfolio. ).
Furthermore, I There were definitely some companies that did well during this period, taking advantage of unwarranted market panics around some individual stocks (two recent examples that immediately come to mind are Owl Capital is plummeting (owl) Last May, I bought big when the stock fell to about $10 per share and became an aggressive buyer of Brookfield Infrastructure Partners (BIP) fell sharply in October on the release of short-term reports and concerns about rising long-term interest rates), NextEra Energy Partners (NEP), which turned out to be very sensitive to cost of capital (my mistake as I did not properly consider complex financing schemes when evaluating the balance sheet), and New York Community Bancorp (new york cb) (This was a more random event situation, as it blinded virtually all analysts, not just high-profile investors like George Soros).
Another headwind for my portfolio is that interest rates are likely to remain high for a longer period of time than I originally expected. This is negative for the valuation of businesses with long-term contracts and regulatory agreements that generate stable cash flows.
That being said, my BDC (BIZD) and midstream business (AMLP) overall have fared very well despite these headwinds and have helped to alleviate some of these challenges. Additionally, as a long-term, income-focused investor, I don’t focus too much on timing macroeconomic events, and I don’t worry at all if the portfolio’s stock price performance is weak in his one year. Is not … In fact, I It actually outperformed the broader high-yield market in the US. Dividend ETF (SPYD) for the same period.
Additionally, my international portfolio, which is managed with the same strategy as my core portfolio, had a very strong year, with the best international total return of 1.27%, compared to February 1, 2023 to 2024. The total return through February 1st was 10.3%. -Yields shown on the iShares International Select Dividend ETF (IDV) during the same period.
Looking in the rearview mirror, the current windshield looks like this:
When and why does the Fed cut interest rates?
Current market sentiment appears to be primarily dominated by the following trends:
- Given its significant position in the S&P 500 (SPY) due to the AI boom (you may have heard of a hot stock called Nvidia (NVDA)…) and the overall bullishness for technology stocks. The index continues to rise.
- It is increasingly likely that the US economy will have a soft landing (or no landing at all).
- It is increasingly likely that the Fed will keep interest rates high for an extended period of time.
As a computational engineer by training with expertise in machine learning and deep learning (the key technologies underpinning what we more broadly refer to as “artificial intelligence”), I believe that AI is a legitimate and transformative technological revolution. I completely agree that that is very likely. Our lives will change radically in the coming decades. However, I have been a successful dividend investor in the past and have accumulated investment knowledge centered around this approach through many years of working as an analyst at various dividend investment research firms. So I’m not going to abandon dividend investing to chase dividend/value investing. It’s the latest fad that can make anyone look like a genius (or not) by timing short-term changes in market sentiment.
That said, I’m also a big believer in diversification, so for sectors I don’t spend much time researching myself, such as technology or healthcare/biotech, I simply turn to ETFs to gain exposure. I’m investing. Where I personally believe it can actually add value and outperform long-term total returns compared to high-yield stock funds such as the Schwab U.S. Dividend Stock ETF (SCHD), DIV, and IDV. We are focusing on reporting.
Regarding the current second dominant market trend, I do not intend to make short-term macroeconomic decisions, nor do I intend to focus my portfolio entirely on riding short-term macroeconomic waves. Is not … That said, while I expect the current administration and much of the media’s public statements to remain positive on the economy during this election year, I expect the economy to avoid recession altogether into next year. I remain pessimistic about whether it will be possible. It will take several years for the following reasons:
1. Virtually the entire developed world economy is either technically in recession (i.e. the UK, Europe, Japan) or is grappling with significant economic challenges and surging unemployment rates (i.e. China). Either. Given how interconnected we are with these economies, the impact that these economic challenges have on us cannot be overstated.
2. Main indicators of economic recession – etc. yield curve model – indicates we are still at a “very high risk” of a recession soon.
3. The growing challenges plaguing the commercial real estate sector (just ask NYCB shareholders on this one!), repeated announcements of deep layoffs at various companies, and record levels of consumer demand. There are many cracks in our economy, including debt and corporate debt. . While better-than-expected consumer spending has supported the economy (and inflation) so far, the data appears to point to the fact that the economy is running out of room for more spending. Increased overseas demand for our products and services cannot be expected to support our country either. The labor market also appears to be finally weakening.
4. It often takes time for the full impact of rapid interest rate increases to be fully reflected in economic indicators, and the longer the Fed keeps interest rates high, the less this full impact will be felt by the public. Increased risks that manifest themselves in very negative ways. economy.
5. Last but not least, markets appear to have largely ignored the growing geopolitical risks facing the global economy, particularly in the Middle East and East Asia. If Iran were to become directly involved in the ongoing conflict between Israel and the United States against Hamas and the Houthis, it could cause a significant economic shock and push the United States into recession. Worse still, if North Korea were to officially reignite war with South Korea, the world’s leading economy, or if China were to take action against Taiwan, either through direct invasion or simply a blockade, it would likely have dire consequences for Taiwan. will give. The world economy will deteriorate and we will be plunged into a deep recession or even depression.
This brings us to the third and final major market trend of the moment. Combining these aforementioned macroeconomic and geopolitical risks with the fact that:
- We are in an election year, and there is overwhelming support among world economic leaders for Donald Trump not to regain the presidency.
- Interest payments on the national debt are now soaring beyond the Pentagon’s budget
- And inflation is already trending down quite sharply (given the large lag in real estate statistics, further disinflation is likely in the near future), with China selling surplus products to the world market due to lack of domestic demand. Major developed countries are in recession and the growing impact of AI on the economy is extremely deflationary)
It seems likely to me that any of these numerous factors will affect the economy and inflation numbers, leading to the Federal Reserve cutting interest rates several times this year and next. That being said, I don’t expect a rate cut until June at the earliest, and if inflation holds out until then and the economy remains reasonably strong, a rate cut could be an election move. There is a possibility that it will be postponed until the last minute. By then, the economy will begin to show some very real cracks.
Key points for investors
The recent rise in interest rates poses a severe challenge to my high-yield investment strategy. That said, we are grateful that we were able to identify enough mispricing opportunities and score enough significant wins to be able to stay ahead of market performance.
Looking ahead, the dark clouds over the economy appear to be growing, and it seems very likely that the Federal Reserve will begin lowering interest rates at some point this summer. Only time will tell, but the combination of subdued valuations in many high-yield sectors, recent aggressive buying by prominent investors in these sectors, the likelihood of a rate cut this summer still exceeds 50%, and high-yield stocks will turn out to be among the defensive tendencies. My portfolio includes companies such as Enterprise Products Partners (EPD), WP Carey (WPC), and Brookfield Renewable Partners (BEP)(BEPC), which have the potential to continue to outperform the overall market. I’m pretty confident in my sexuality.
