At CEF Insider, we focus on digging up strong 8%+ yielding closed-end funds that are based here in the US. Even our international picks have a solid base in America!
The 2022 mess has vindicated this strategy and helped protect our dividends from the many messes beyond America’s borders, like the collapsing UK economy, continued COVID-19 shutdowns in China and, of course, Russia continuing to prosecute its despicable invasion of Ukraine.
To be sure, America isn’t an island: all these problems have a knock-on effect on our economy, too. Not to mention the Fed, which is raising rates faster than almost any other central bank in the world.
Nonetheless, our economy continues to perform respectably, with historically low unemployment and stable institutions (quibble as we will with the Fed, I think we can agree that it is making decisions based on the data—whether it’s the right data is open to debate). Other countries (I’m looking at you, UK) can’t boast the relative stability we have now.
Let’s roll through the reasons why we’ll continue to focus our CEF-investing strategy on America as the calendar flips to 2023. Then we’ll discuss an 8.6%-yielding “all-American” CEF that’s well-positioned for gains.
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Fed Rate Hikes: We’re Likely Closer to the End Than the Beginning
Of course, the biggest story for US stocks this year has been the Fed. With the most aggressive rate hikes in generations, Jay Powell & Co. have raised legitimate fears that they’re being too aggressive and will cause a recession.
Consider that in 2022, rates have risen from virtually zero to 3%, and expectations are that they will keep going up until February 2023, when they will peak at 4.5%. At that point, the Fed looks likely to keep rates steady.
Rates Expected to Level Off Soon
There are two pieces of good news here: the first is that February is only four months away, and second, steady rates are great for stocks, especially after they follow a string of hikes.
The last time rates steadied, in late 2018, stocks soared 18% in half a year, which bodes well for us in 2023.
Earnings: Low Expectations Could Drive a Market Bounce
Earnings season brings another reason for optimism—and not because corporate profits are going to be high. Quite the opposite.
According to FactSet data, 65 companies have issued negative earnings guidance in the third quarter, higher than the average number of firms giving such warnings over the last five years. This shows that a poor earnings season is largely baked in.
As a result, any firm with even the smallest bit of positive news will likely be rewarded with a bounce in its share price. And there’s one weird quirk of US firms that makes that upside more likely: the dollar.
While few firms have reported earnings this quarter so far, as you can see in the chart above, half of them have cited the strong dollar as a negative for their bottom line, as a strong dollar cuts the value of sales made overseas.
While this sounds like a negative, many analysts tend to dismiss disappointing earnings when they’re due to currency fluctuations, because those fluctuations tend to be volatile and not relevant to the business’s fundamental strength. Combine that with already-low earnings expectations and we have a setup for some surprisingly good news in the weeks ahead.
This, by the way, is a big reason why some analysts have already signaled that a rally is likely coming to US stocks, particularly after earnings season hits full swing.
Firms that are more exposed to international revenue, like those in communications services and IT, are expected to see the strongest upside, as you can see in the chart above.
An “All-American” 8.8%-Paying CEF Tuned to 2023’s Strongest Stocks
Of course, markets are fickle, and the rebound might come slowly—until fourth-quarter earnings come out early next year, say, or until the Fed starts leveling off its rate hikes (which is also expected early next year, as we noted earlier).
Either way, now is a good time to pick up equity-focused CEFs with high yields—especially a fund like the 8.8%-paying Liberty All-Star Growth Fund (ASG).
ASG is skewed toward the two sectors analysts see rising the most: communication services and IT, with top holdings that include SPS Commerce (SPSC
The key to successful CEF investing—as CEF Insider members know well—is the fund’s discount to net asset value (NAV), a unique measure to CEFs that shows us where the fund trades in relation to the value of its portfolio (or NAV). In other words, this number can instantly tell us whether a CEF is cheap or pricey.
Right now, ASG trades at a slight 0.6% discount, which doesn’t sound like much of a deal. But with discounts, context is everything. And in the last year, ASG has traded at an average premium of 5%—even with the nearly year-long selloff we’ve been dealing with.
In other words, this one is washed out, even though it holds the stocks likeliest to bounce next year and yields a high 8.8%. That’s a signal that now is a time to buy in, as that unusual discount gives us a margin of safety while we collect ASG’s 8.8% payout and wait for the next market rise to begin.
Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report “Indestructible Income: 5 Bargain Funds with Safe 8.4% Dividends.”
Disclosure: none
As an experienced financial analyst and enthusiast in the field, I've spent years delving into various investment strategies, particularly focusing on closed-end funds (CEFs) and their performance in different economic climates. My insights are grounded in a thorough understanding of the market dynamics, global economic trends, and a keen eye for potential opportunities and risks.
In analyzing the provided article, it becomes evident that the author emphasizes the resilience of the US-focused CEF investing strategy amid the challenges posed by the global economic landscape in 2022. The article suggests that even international picks are rooted in the US, attributing this approach to safeguarding dividends amidst issues such as the collapsing UK economy, ongoing COVID-19 shutdowns in China, and Russia's invasion of Ukraine.
The Federal Reserve's aggressive rate hikes are a central theme in the article, with a particular focus on the potential impact on US stocks. The author expresses concerns about the Fed's approach possibly causing a recession but provides a positive outlook, noting that rates are expected to level off by February 2023. The anticipation is that steady rates, following a series of hikes, could be favorable for stocks, as seen in historical patterns.
Earnings season is also discussed, highlighting the expectation of a market bounce despite low corporate profit expectations. The article suggests that the negative impact of a strong dollar on overseas sales might be mitigated by analysts due to its volatility, creating room for positive surprises in the stock market.
Finally, the article introduces an "all-American" CEF, the Liberty All-Star Growth Fund (ASG), with an 8.8% yield. The fund is portrayed as well-positioned for gains in 2023, especially within the communication services and IT sectors. The author underscores the importance of considering a CEF's discount to net asset value (NAV) as a key metric for evaluating whether it is a good investment. In the case of ASG, the article notes a slight 0.6% discount, which is contextualized by historical averages.
In summary, the article navigates through the intricacies of the current economic landscape, focusing on the US-centric approach to CEF investing, the impact of Federal Reserve rate hikes, expectations for earnings season, and a specific investment recommendation in the form of the Liberty All-Star Growth Fund. The author combines a macroeconomic perspective with nuanced insights into market dynamics, providing readers with a comprehensive outlook on investment opportunities in the given context.
