If you’re like most people, you’re wondering one thing right now: can stocks keep soaring following December’s nosedive—even after spiking 8% in January?
The answer? Absolutely.
To get at why I’m so sure, we’ll first go a couple steps further than headline-driven “first-level” investors do. Then I’ll give you a way you could double (or more) your rebound gains thanks to a terrific closed-end fund (CEF) yielding 7.2%—and “spring loaded” for 35% returns this year.
The Ignored Connection Between Jobs and Stocks
To get at what’s in store for the markets in 2019, we have to go back to 2009 and zero in on one thing: jobs. Because the crisis back then triggered a lost decade that only ended in 2017, when the unemployment rate finally got back to pre-crisis levels.
Then something strange happened—unemployment kept falling. In January, payroll data rose to one of the highest levels ever, blowing away even the rosiest estimates.
In such a job market, inflation seems like a sure thing. After all, when everyone who wants a job can get one and more jobs are created every day, employers will need to pay higher wages to keep the workers they have. And consumers will open their wallets, confident they’ll be earning more. But we’re not seeing that.
This has stumped many economists, because it’s normally a given that lower unemployment stokes inflation. But there’s a simple explanation for what’s happening today, and it comes back to folks who are unwillingly out of the workforce.
Here’s what I mean: the government measures unemployment by looking at what percentage of people are in the labor force, then looking at what percentage of those people don’t have jobs. But people can choose to be in or out of the labor force at any given time—and plenty of people have made an exit in the last decade.
For much of the 2010s, the unemployment rate wasn’t falling because more people were getting jobs—it was falling because more people gave up on getting jobs. But workforce numbers flat-lined since 2015 and began rising in late 2018. In short, Americans who’d thrown up their hands are getting back in the game.
That means inflation could be a risk in the future, when all those who left the labor force have come back, but we’re a long way from that.
In sheer numbers, think of it this way: 66% of 306 million people were in the labor force in 2007. That’s 202 million men and women. We’re now down to 63.2% of 327.16 million, or 206.8 million people. Another way to think about it: in the last 12 years, our labor force is up just 1.6% while our population is up 6.9%.
This is unsustainable: America needs more workers to keep up with its bigger population.
“A Rare Time When You Can Buy Stocks at a Discount”
This all means the market recovery will likely continue, because there’s too much demand for workers—and workers have too much money to spend—to cause a market hiccup. Better still, we’re at a rare time when you can buy stocks at a discount—and an even bigger discount is on the table for us, thanks to closed-end funds (CEFs).
Let me explain.
CEFs slipped in 2018, only to start recovering in early 2019.
But as you can see, CEFs still haven’t fully recovered—and there’s still a big gap between their 2018 peak and where they are now, even though CEFs’ year-to-date recovery has beaten the S&P 500’s 9.1% bounce, with the CEF Insider Equity Sub-Index up 11.1% in 2019.
That tells me that this could be another year where CEFs outperform, as they did in 2017. And they’re likely to do so for the same reason: they were oversold in the prior year.
The One Fund to Buy for 35% Gains (and 7.2% Dividends) in 2019
Which brings me to the Dividend and Income Fund, which focuses on bargain-priced US stocks like Apple, Intel and the Walt Disney Company. DNI is now signaling that it’s in the early stages of a huge recovery.
But DNI still falls short of where it was in early 2018, so it has plenty of runway ahead!
How high can DNI go? If we track its 2017 performance from when it got absurdly oversold at the end of 2016 (as it was absurdly oversold at the end of 2018), we see that a 35% return was in the cards.
And since DNI’s decline in ’16 wasn’t as severe as in ’18, there’s a good chance this year’s return will be even bigger than 35%.
One reason why I’m confident is that the fund’s unusually large 23% discount to net asset value (NAV, or the market price of its underlying portfolio) means that, just to sustain that discount, for every 1% its NAV gains, DNI’s price will have to go up 1.3%. If the market wants to make that discount disappear (as it did in 2017), its price will obviously have to go up much more than 1.3% for every 1% of NAV gains.
The kicker? DNI yields an outsized 7.2% now, so you’re getting around 20% of your potential 35% return in cash here.
Better still, DNI is far from your only choice: there are many other CEFs yielding as much or more than this fund and also look set to clobber the S&P 500. And these income wonders invest in similar top-notch (and cheap) US companies.