Preferred stocks have been good investments. Preferred investors are up about as much as stock investors in 2017, but with less risk. A preferred that I’ve been adding to client portfolio is the new Annaly Capital Management 6.95% Series F Fixed/Float (NLY.F)
Preferreds aren’t the only income vehicle showing strength. The SPDR Utilities ETF (XLU) is up 12.5 percent year-to-date, excluding dividends. What does the strength say about interest rates? Low for longer.
There is still talk of higher interest rates, but that is mostly from Fed officials. Before Hurricane Harvey, the futures market showed only a 20-percent chance of a rate increase in December. Now the chance of a rate hike is lower still. Once again the path that Fed chair Yellen laid out early in the year will be off the mark. There will probably be only two rate increases this year, not her four. Wall Street has a clear message to Janet Yellen, i.e. “Once again we don’t believe you.”
The market has another message: the economy in the coming year will look similar to the economy these past few years. The widely expected growth spurt is being tempered due to what is part tragedy, part comedy, part farce, and overall inaction in Washington.
If rates will stay low for longer, as I expect, by definition that will be bullish for stock valuations. In brief, the lower the interest rate the higher the present value of future earnings and dividends and with it stock prices. Rising rates would have the opposite effect.
All that said, if most if not all of the Trump agenda fails to be enacted stocks would give back some of their post-election gains, at least temporarily. That increasing possibility was one message of the selling over the past few weeks, but one short lived. Investors know that no matter how the agenda fares stocks would be attractive due to low-interest rates and alternatives that would remain unattractive. It should be noted that for many decades “gridlock” in Washington was good for the market. Still, if there is a tax cut or infrastructure spending then that would act as a tailwind for stocks.
