At its midpoint, 2019 promises to be another rewarding year for income investors.
With U.S. interest rates flat or falling, total returns on bonds and yield-oriented alternatives, such as preferred stocks, real estate investment trusts and master limited partnerships, are far into the green, overcoming by a long shot last winter’s low expectations.
There’s simply a surplus of yield-seeking money in America and elsewhere and a chronic lack of safe and appropriate investments.
The brute forces of supply and demand boost returns, but so do restrained interest rates and the inflation-strangling effects of technology and increasing efficiency in the everyday economy.
This is the way of the world today: The global inflation rate is around 3%, close to a 40-year low, and interest rates and credit markets from Australia to Brazil to India to Thailand are channeling the favorable trend.
For your portfolio allocation and strategy, figure that for the rest of the year the bond market will continue the course it has been on since the credit crisis and recession of a decade ago, with only a few brief stumbles.
The sweet, early-2019 total returns, such as 4% to 6% for tax-exempt bonds and 16% for property-owning REITs, aren’t going to double by December, but neither is there any reason to grab profits out of fear of things collapsing. Breaking even on principal and pocketing interest and dividends between now and year-end would be a fine outcome.
If the stock market implodes, because of tariffs, tweets, weak earnings, Brexit or who knows what else, then high-quality bonds and solid dividend-paying investments, such as specialty finance firms Ares Capital (symbol ARCC, yield 9.0%) and Hannon Armstrong Sustainable Infrastructure Capital (HASI, 5.1%), would benefit or at least hold their own.
Krishna Memani, the chief investment officer of Oppenheimer Funds, has been spot-on with his outlook for seven years and counting.
Recently, he said to expect “five more years” of favorable credit market trends. He expects U.S. economic growth to trend at 2%. He adds that “there’s a total lack of inflation” other than blips from something transitory, such as gasoline prices.
Rick Rieder, fixed-income chief at BlackRock, reiterated that the immutable worldwide shift from farming and manufacturing to services and intangible goods means economies everywhere can grow faster without igniting inflation at levels seen in the past. This keeps interest rates down and boosts both stock and bond returns.
Rieder isn’t promising five more years of bliss. But five years ago, who would’ve thought we’d see what we’ve seen? So, everyone, carry on.