The Income Rally Roars On

No sooner do I warn investors that stock and bond prices are too high and point to spreading ir­rational overexuberance (see Beware the Roaring Twenties) than all my favorite income investment categories go even more wild to the upside. Serves me right for questioning this market. I’m not abandoning all caution. I still believe that AT&T (symbol T) shares are expensive and that closed-end funds with nutty premiums to net asset value will fall toward earth. But sometimes the best moves are the ones you don’t make and the right course is to take what the market is giving you, no questions asked.

In January, Standard & Poor’s broad municipal bond index returned 1.64%, the index’s biggest one-month gain since 2014. Strategists at T. Rowe Price just officially declared utilities a growth sector—no longer dull bond alternatives—and predicted that utility earnings will exceed those of the S&P 500 index for the next few years. Triple-B-rated corporate bonds, which a year ago marinated in fear and loathing, have gained close to 2.6% so far this year and 15% over the past 12 months. (Returns and other data are as of January 31.)

Gripes about market risks now seem feeble. The corona­virus? In the sometimes-perverse way of the bond market, this human tragedy and economic hurdle is a giant gift to bond investors, causing even faster rivers of money to seek haven in U.S. dollars and government debt, driving down interest rates. This development has brought back the not-so-dreaded “inverted yield curve,” which occurs when short-term yields are higher than long-term ones. It’s ostensibly a harbinger of recession, and typically prompts warnings of bond-price losses and defaults. The reality: Unless the inversion is a result of the Federal Reserve pumping short-term rates skyward, it’s trivial.

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Ignore the political polls. A few scattered pundits are spreading nonsense that the better Bernie Sanders looks in polls and primaries, the likelier the markets’ accumulated gains are to atomize. We saw similar warnings of massive in­flation and tax increases concomitant with the 2008 surge of Barack Obama to his party’s nomination, as well as four years later at his re-election. Quite a few market sages also greeted Donald Trump’s election as likely to be troublesome for investors because the markets hate surprises, and Trump was a surprise. Whatever your political leanings, I remind you that the Fed’s actions, companies’ earnings and dividends, and price stability matter mega-times more than politics.

As for the troubles at Boeing and the sinking price of oil and natural gas, well, what happens at Boeing (BA and Exxon stays at Boeing and Exxon. There’s no risk of contagion to the broader markets. (For more on ExxonMobil, see The Kiplinger Dividend 15 Update.) If you’re tempted by the juicy yields, I’d say first check out taxable municipal bonds (see Taxable Munis? They’re Worth a Look) and out-of-favor real estate investment trusts, such as those investing in hotels, senior housing and health care facilities.

Investment managers and advisers who meet with rank-and-file investors are more grounded than the pundits. I surveyed members of the fee-only financial planners’ organization NAPFA as to whether it is becoming urgent for retirees to “take a knee,” or purge all portfolio risk. Very few said it’s time for a run on CDs, money market funds or online savings accounts.

The folks at Columbia Threadneedle Investments publish a monthly markets barometer. Tellingly, they fall in the neutral zone—neither bullish nor bearish—on key investment categories such as U.S. large-company stocks, small caps, growth stocks and value-oriented fare. Ditto for Treasury, investment-grade, municipal and junk bonds, as well as REITs and more. The clear, unambiguous conclusion: Hang in there.