2016-Q2 Quarterly Update
Dear Mr. and Mrs. Smith,
What a year this has been and it is only half over. The major stock markets lurched higher and lower reacting to China’s recession scares, job reports, Federal Reserve action or inaction and Brexit; to close the first half with the Standard and Poor’s 600 Index (S&P 500) at 2,098.86, up only 39 points. The S&P has since gone on to a new record high which is impressive considering the previous five consecutive quarters of declining profits. We expect double-digit earnings growth in the second half of 2016 making TIA’s year end S&P market forecast of 2216 realistic. We continue to forecast that the stock market moves hither for years. This stock market has all the characteristics of the longest bull market in U.S. history.
The biggest winners in the US equity market have been stocks that look and act like bonds, such as utilities, telecoms and consumer staples, providing dividend income with limited growth and steep valuations. We own some of these stocks in our Income Equity Portfolio (IEP) which achieved a double-digit gain in the first half of the year, while the S&P 500 was up only 2.69%. In addition, IEP has a current dividend yield over twice the S&P yield of 2.2%.
Confident predictors of higher interest rates seem a distant memory as bond yields have declined to record low levels. Investors continue to chase yield by buying bonds as a safe haven. US Treasury yields are barely offsetting inflation forecasts. TIA has been investing in preferred stocks in lieu of bonds for almost eight years. Our Preferred Income Portfolio (PIP) is a unique fixed income portfolio with a current yield of 6.42%, which is over 4% higher than the 30-year US Treasury bond. We believe this interest spread will provide PIP a margin of safety when interest rates reverse and begin to normalize. TIA continues to believe that interest rates will stay lower longer than in previous credit cycles.
TIA has developed preferred portfolios for the three typical objectives of fixed income investing. PIP is a diversified portfolio suitable for most investors. Our Non-Cumulative Preferred Portfolio serves as an alternative to municipal bonds, while the Shorter Call Preferred Portfolio is a cash management tool. We feel these preferred portfolios continue to be well suited for this uncertain environment which we see continuing for the foreseeable future.