Sure, 2023 brings a lot of uncertainties, but one thing we can be sure of is that buying stocks now—particularly if you do so through high-yield closed-end funds (CEFs)—will likely pay off in the long run.
I say that we CEF buyers stand to gain in the long run because, well, history is on our side here. Consider that even folks who bought the average S&P 500 stock at the height of the market in January 2020 are still up about an annualized 6%. That’s less than stocks’ long-term 8% average, sure, but it’s still a decent profit, all things considered.
Of course, those who stuck with stocks and bought more during the COVID-19 selloff did amazingly well—anyone who bought that dip is now up nearly 75%!
Dip Buyers Bag Big Gains
And that’s just for investors who bought plain-vanilla stocks! Those who buy high-yield CEFs have the added advantage of getting most (or in some cases all) of their returns in dividend cash rather than unpredictable “paper gains,” thanks to CEFs’ superior yields, which are regularly upwards of 8%.
2023 Will Continue to Be a Stock, Er, CEF-Pickers’ Market
So while we can be confident about the long term, the short term (i.e., the next year) will be one of the most important periods in the history of CEFs—a year in which picking the right funds for the constantly shifting environment (and moving out of those that no longer make sense) will be critical.
Here are three trends I’ll be watching in the coming year:
1. Inflation: The Pace of Slowing Will Be Critical
Fortunately, inflation has been gearing down for many months. But unfortunately, the rate is in no big hurry to drop to the Fed’s desired level of 2%.
Inflation’s Lazy Downward Swing
That muddies the waters for 2023 because the Fed can’t tolerate too much consumption, or it’ll be forced to goose interest rates higher than anyone expects. In light of that, I’ll be keeping a keen eye on the key inflation numbers, including the headline and core consumer price index (CPI), and adjusting our portfolio appropriately.
For example, if you’ve been reading our issues and articles lately, you likely know that we often favor covered-call CEFs (whose option-selling strategy thrives in a volatile market) when things get rocky. And when markets settle or move higher (which we would expect if inflation surprises to the downside in 2023), we tend to favor “pure” equity funds, which are more likely to outperform investments that try to hedge against volatility.
2. Unemployment and GDP Growth Will Shape the Rate Picture
We haven’t seen a 4.5% interest rate in nearly 20 years, but that’s where we are now. And the Fed has made it clear that the Fed funds rate will get to 5% by March and, when it does, it’ll stay there for a long time.
Just how long is a “long time,” though? Currently, markets and the Fed disagree, with the Fed releasing forecasts suggesting rates won’t be cut until 2024 or 2025 and the markets pricing in cuts as early as late 2023. If the markets are right, we could see stocks soar in the coming year.
For our part, we’ll be watching statistics like unemployment rates, inflation and GDP growth in the first few months of 2023 to see which way things are headed.
3. Sentiment: Fear-Dominated Market Could Set the Stage for a Big Jump
Markets have swung wildly in 2022, but “extreme fear” certainly won out, with fearful conditions lasting longer than the brief moments of hope.
This is not normal. In fact, most years it’s the exact opposite, but it is what you’d expect in a market of high inflation, where fears of a recession are incessant.
The good news is that this kind of fear-dominated market doesn’t typically last long, which suggests the market has priced in a significant recession in 2022. So if we get anything less than that, it’ll be another upside catalyst for our CEFs.
That’s especially so when you consider that the 12-month bear run we’ve lived through this year has happened during a time of economic growth and rising corporate profits.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."