Should 2018 Auld Acquaintances Be Forgot?
Should auld acquaintances be forgot,
And never brought to mind?
And never brought to mind, as some stock and bond market investors would prefer? Certain trends that began last year will likely carry over into 2019.
These were four horsemen that made their acquaintance last year (listed in chronological order):
1. April 24, 2018: the yield on the ten-year Treasury crossed 3% for the first time since 2014 and rose to about 3 ¼% through November. Bond prices and yields move in opposite directions. When the price of a bond moves lower, it negatively impacts total return (which is a combination of income received and any gain or loss on the capital investment).
While prices of U.S. government bonds recovered in the fourth quarter, prices for debt obligations of U.S. corporations did not and finished the year with their worst performance since the financial crisis. Scott Minerd, global chief investment officer for Guggenheim Partners, tweeted in November that worries about the viability of General Electric Company were not isolated, and that “the slide and collapse in investment grade debt has begun.”
2. May 14, 2018: the dividend yield on the S&P 500 fell below the yield on the three-month Treasury bill for the first time since 2008. As of this writing, this trend continues with trailing twelve-month yields on S&P 500 dividends and three-month Treasuries at about 2.1% and 2.4%, respectively. Investors can currently pick up some yield by loaning money to a government that’s partially shut down!
3. September 21, 2018: the S&P 500 stock market index peaked at 2,940.91. This broad equity market gauge moved -20% lower in December to enter into the bear market territory before rallying to reclaim a portion of these losses.
4. December 3, 2018: the yield curve inverted for the first time in a decade. The yield curve here is defined as the difference between three-year Treasury yields and five-year Treasury yields. When short-term yields are higher than longer-term yields, it is a necessary but not conclusive indicator that a recession is ahead.
In sum, both stocks and bonds both had a rough go of things in 2018. Looking ahead to this year, will things be much better for these asset classes as we bid farewell to auld lang syne? Or more likely, will income-oriented investors once again be on the defensive as the principal value of their investment swings around wildly with gut-wrenching volatility?
We hear from income-oriented investors that dividend-paying stocks could be a port in the storm, or at least they would like them to be. Again, dividend yields are currently lagging in comparison to short-term risk-free obligations of the U.S. government. What is the outlook for corporate dividends when we could be seeing signs of both an economic slowdown ahead and concerns over corporations’ ability to service and repay their debt? A corporation has a legal responsibility to pay a dividend only after being declared by the board of directors. Dividends can go up and down; they are not a source of guaranteed income.
According to Bloomberg, for the first time in fifteen years, the S&P 500 is incredibly now more volatile than the price of silver. Retirees and pre-retirees relying solely on stocks and bonds for passive income should heed the words of the late economist John Maynard Keynes: “Markets can remain irrational longer than you can remain solvent.” In other words, an investor’s timeframe could be shorter than the length of time it takes for a trend to run its course completely. We think what happened in 2018 doesn’t stay in 2018.
Fixed index deferred annuities provide an alternative for income generation without the loss of principal from poorly performing markets. In a white paper titled ‘Fixed Index Annuities: Consider the Alternative’ published a year ago, Dr. Roger Ibbotson and his research colleagues concluded that fixed index annuities “offer a more tailored risk profile than bonds, capturing a portion of the growth offered by large-cap stocks, while lowering overall market risk.” For a better-than-average chance of a better-than-average return as well as an income stream guaranteed by the claims-paying ability of the issuing insurer, consider fixed index deferred annuities as part of your retirement portfolio.