As of early May, an estimated 100 million Americans have been vaccinated against the Covid-19 virus.* As a result, more and more states are easing pandemic restrictions, allowing more businesses to get back to operating near full capacity. All this is happening just as many corporations are reporting record earnings.** Partly in response to all this, the stock market continued climbing in the first half of April, with the Dow Jones Industrial Average topping 34,000 for the first time ever on April 15th.*** That’s good news, but it’s important to remember the markets are forward-looking. They generally anticipate economic developments more than they react to them, which is probably why after hitting new records in mid-April, they paused for the rest of the month to consolidate and consider whether this economy is in danger of “overheating”.
In addition to record first quarter growth, long-term interest rates saw a big jump from the start of the year to early April. Although rates have leveled off and come down a bit since then, their rise, combined with rapid growth, have triggered concerns about inflation. Will it happen, and will the Fed overreact and raise short-term rates too soon again? Here’s my take: Yes, I believe we’ll probably see some inflation in the coming months, but it will most likely be transitory, not permanent. It will occur mainly from a short-term spike in demand prompted by many people having the means and desire to spend again after being in lockdown for much of last year. Once all these people get the pent-up urge to spend out of their systems, demand will level off again, the Fed will keep short-term rates where they are, and the recovery will continue at a pace that doesn’t spook Wall Street.
Of course, in the current new Age of Economic Uncertainty, forecasting even the short-term future of the markets is more challenging than it used to be. The inflation spike may be transitory, or it may start a domino effect that leads to the next major market correction. The bottom line for income investors is to never lose sight of the reason you’re invested for income in the first place: to have a strategy that helps ensure your retirement income and attempts to minimize your risk regardless of market conditions. If the last year has taught us anything, it’s that the income model not only meets these core objectives, but has the potential to pay even more dividends under certain market conditions—both literally and figuratively speaking!
When managing your portfolio at SIS, we look for one of four possible “enhancement” trades while reviewing securities and possible transactions. Income generation is our primary goal for our clients, and we consider the following four portfolio enhancements before transacting: current yield, yield to worst (minimum projected annualized total return), interest rate risk, and default risk. The intents of these transactions are categorized as follows:
- Pay Me Now – Enhancing current yield
- Pay Me Later – Enhancing yield to worst
- Cover My Assets I. – Managing interest rate risk
- Cover My Assets II. – Managing default risk
We evaluate the transactions by determining whether they meet one, two, three, or all four enhancements. A baseball analogy for this: SINGLES, DOUBLES, TRIPLES, and HOME RUNS.
No swaps this month.
*“Number of Americans Fully Vaccinated Tops 100 Million,” AP News, April 30, 2021
**“Wall Street Logs Early Gains Monday on Strong Earnings,” AP News, May 3, 2021
***“Dow Ends at Record Above 34,000” MarketWatch, April 15, 2021
Note: The above trades were recent block trades and do not reflect all trades done on an individual specific basis. Sound Income Strategies, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance is not an indication of future results. Be sure to first consult with a qualified financial advisor or tax professional about your specific financial situation before implementing any strategy discussed herein.
You are advised to give independent consideration to, and conduct independent investigation with regards to the information above in accordance with your individual investment objectives. Use of the Information is at the reader’s risk, is strictly intended for informational purposes in conjunction with the recipient’s due diligence, and should not be construed as a solicitation by Sound Income Strategies, LLC. Past performance will never indicate or guarantee future behavior. Sound Income Strategies, LLC does not represent or warrant that the contents of the document are suitable for you from compliance, regulatory, legal, or any other perspective. We shall have no responsibility or liability for your use or non-use of the document or any portion thereof.
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