An Alternative To Money Market Funds
July is behind us and both the Dow Jones Industrial Average and S&P 500 retreated from their all time highs as several blue chip companies reported disappointing quarterly results. Commodity prices in both the energy sector and industrial metals softened noticeably as China’s economy continues to struggle, along with the economies of other emerging market countries.
Interest rates in the US and Europe remain low but above their amazingly low yields reached during the second quarter. The Federal Reserve has remained neutral on any rate increase so far. The Fed’s next meeting is set for September 16-17 and few expect the Fed to raise rates at this meeting due to the continued weakness in the economy.
The significant drop in commodity prices follows the ongoing weakness in China throughout 2015. But there are other factors at play as well. The majority of commodities are priced in US Dollars so the rising dollar makes it more expensive for foreigners to buy commodities. Higher interest rates have also hurt commodities as rising interest rates can lead to slower economic growth. So, the Fed meetings in September and December will be closely watched.
Commodities do not offer income payments which makes them less attractive to bonds and other quality dividend paying stocks in a rising interest rate environment. Note that many commodities are now trading below levels not seen since 2002, as the global economy recovered from the shock of the 9-11 attack in America.
IBM, Caterpillar and United Technologies reported disappointing quarterly results last month as revenue growth continues to be elusive for many S&P 500 firms. IBM’s results were particularly troubling. During the second quarter, IBM’s sales saw declines across all of its major business units. Its results missed Wall Street analyst estimates and marked the 13th consecutive quarter of declining revenue.
As companies continue to struggle to grow revenues, several large corporate acquisitions have recently been announced such as Anthem’s buy of Cigna and Aetna’s buy of Humana. There is no guarantee these deals will ultimately be completed, though. The Obama Administration has made long regulatory reviews of proposed deals as the norm. These deals in the healthcare sector will receive extensive scrutiny. After all, Obamacare is the signature achievement of the Obama Presidency.
Maintaining a defensive stance continues to be our focus as we employ our conservative dividend capture strategy. Even though sectors such as utilities, the major oils and the oil and gas pipelines have fallen out of favor, these companies offer generous dividend yields with the opportunity for significant capital gains over the next year. Note that 2016 is a Presidential election year and the 2016 election is only 15 months away. Better days lie ahead!
My weekly radio show on WWPR 1490 AM is on vacation. We will return on Friday, September 11. Meanwhile, my monthly newspaper column will continue to run throughout the Summer and beyond.
If you are unhappy with the returns now offered by money market funds feel free to contact us.