It’s almost 2023, and we’re on the brink of something that’s never happened in our lifetime: a recession is coming – and when it does, it will surprise nobody.
Believe it or not, it’s good news because it allows us to buy stocks – and high-yield closed-end funds (CEFs) – at low prices at present. We don’t have to wait months for the recession to subside.
I have an 8.4% yielding CEF to consider below. It’s discounted twice: once because the stocks he owns, which include standout S&P 500 stocks like Visa
Now is the time to buy this one. Here’s why.
The ‘real’ yield curve locks into a 2023 recession
A closely watched recession predictor is the relationship between two-year and 10-year Treasury yields. When the yield on the two-year movements above that of the 10 years, a recession is likely on the way.
This is fairly well understood by most people, but this much-vaunted indicator has sometimes been wrong. That’s why I’m looking for a reversal in three-month and ten-year treasury yields, which predicted every recession of the past 50 years. And the shorter yield did peak briefly above the 10-year yield in mid-October, indicating that a recession is on the way, likely within a year.
The stock markets are hardly surprised; they’ve been evaluating a recession for a year now. And that’s where our buying opportunity lies, because that’s extremely rare for stocks to fall into a bear market for 12 months.
In fact, he didn’t happened before a recession in the past 50 years. During this period, stocks were either down slightly, flat (2001, 2008) or up (1991, 2020) in the year before the recession. In other words, this recession is the more anticipated in recent history and the most expensive.
How long you have to wait
This probably means that we won’t have to wait as long for prices to recover from the recession, because the market is ready. But how long will we have to wait?
Average waiting time: one year
Historically speaking, negative one-year returns are quite rare (they occur 20.7% of the time in total), and those negative returns turn positive. 100% of the time if we wait long enough.
Over time, negative periods disappear
Also note that many of these unusually long periods when the market offers negative returns were between the dot. assess future downturns. In other words, the opposite today’s market conditions.
Large unpopped bubbles lead to the longest slowdowns
This clearly shows that the market priced in more pain than usual, including a recession, something stocks haven’t done in two generations. That’s why now can be the better time to buy.
An 8.4% dividend to play this pre-recession dip
There are three ways to buy this built-in recession: stocks, ETFs or, our favorite route, high-yield CEFs.
I say “our preferred path” because CEFs pay us over 7% in dividends, so we get most of our return in safe cash. CEFs also regularly trade at discounted prices compared to their real value (and especially today) and allow us to hold the same branded stocks we probably hold now, except with much higher dividends than we we get by buying them ourselves.
A CEF like the Liberty All-Star Growth Fund (ASG), for example, owns many big names in the S&P 500 while paying an 8.4% dividend yield. ASG can afford to pay this large payout by periodically and strategically selling its holdings and taking profits, which it then returns to investors in the form of cash dividends.
Also, as I mentioned at the beginning, ASG is on sale in two ways: first, it is now trading at a 2.4% discount to net asset value (NAV, or the value of the shares of its portfolio), even if it is traded at a prime for most of the past decade.
ASG has historically outperformed the market, but it converged on the S&P 500 in 2022 as its tech holdings saw a bigger selloff than the broader market and its normally large premium (which was 20% in 2018 and over 10% for most of 2020 and 2021) turned into a discount. This gives us two opportunities for profit: first when ASG’s portfolio returns to the historical average outperformance of the S&P 500 and as the fund’s discount disappears.
Until these things happen, we have a yield of 8.4% to keep us flush with cash and help us avoid selling in a bear market.
Michael Foster is Senior Research Analyst for Opposite perspectives. For more revenue ideas, click here for our latest report »Indestructible income: 5 advantageous funds with stable dividends of 10.2%.”