Trump’s repeated failure in getting his pro-business policies passed made investors cautious that markets might witness a crash in the absence of such a catalyst for growth.
The Senate Finance Committee revealed a version of the tax plan. The Senate decided not to implement the corporate tax slab of 20% before 2019. While, Trump wanted to abolish estate-tax exemption, the Senate has actually doubled it.
Moreover, the Senate’s version revokes completely the deduction for state and local taxes. Although, in order for Trump to finally sign the bill into law both the versions of the tax plan need to be on a common ground.
Meanwhile, U.S. stocks continue to be overvalued. Though the major indexes have rallied in the recent past amid upbeat corporate earnings, the gains have been impulsive. Under such uncertainties, we suggest that one must place their bets on high-yield mutual funds instead, which seem prudent investments.
Has Trump Really Caused a Stir in Markets?
Immediately after Trump’s election, when parts of America were absorbing the shock of what they had witnessed, markets went berserk. Well, this hysteria that the markets experienced had much to do with Trump-trade. His campaign trail promised of tax-reforms, the totally unnecessary repealing of Obamacare and his claim to devote $1 trillion toward improving the infrastructure of the United States.
Quite interestingly, the question on every investor’s mind is: what has Trump done in a year of his service? Let’s start with tax reforms. The very prospect of a tax reform was the primary catalyst to such a stellar rally in the markets. It pushed the Dow to surpass the psychological 23,000 mark in under a year of his tenure. Trump’s tax reform sought to reduce the corporate tax rate from 35% to 15% initially. Now, the administration has presented a revised plan to reduce the corporate tax to 20%. The suggested rate is still lower than 35% but throughout his campaign trail, Trump kept harping on the fact the tax rates would be slashed to 15%. Now that the administration chooses to raise it to 20% shows that Trump has divulged from his promises.
However, the President and his aides have worked toward making the plan a success with the House of Representatives even passing the Tax Cuts and Jobs Act under which they’ve revealed the details of the plans. Whether or not it will be signed into law remains a big question. One is forced to believe that this would be an uphill task for Trump, given his history of failure on numerous occasions to revoke the Affordable Care Act. The administration also announced that it planned to terminate subsidies worth billions of dollars to health insurers under the Affordable Care Act, a move touted to take Trump a step closer to repealing Obamacare. He had reasoned that there was no law which stated that subsidies and funds have to be earmarked for health insurers under Obamacare. Such plans fizzed out once a bipartisan agreement was signed on healthcare which meant that he could not cut the subsidies. It is therefore highly unlikely that we would see a reform in taxes anytime soon.
Finally, his claim to spend $1 trillion to rebuild roads, bridges and runways within the United States has fallen apart. Over the next 10 years, Trump had strategized to allocate $200 billion to improve the American infrastructure. However, this was sidelined by his colleagues in order to focus more on tax-reforms. In fact, Steve Mnuchin, the U.S. Treasury Secretary commented that the administration would take up infrastructure post tax reforms, which is still a distant dream for an average American.
Overvaluation May Cause Market Crash
Markets have exceeded expectations on numerous occasions this year, leading to upbeat results. While much of the performance has been due to hopes of possible tax reforms, market pundits believe this has got a lot to do with stocks being overvalued. As a matter of fact, Wall Street officially ranks among the world’s most expensive markets on a number of metrics. In fact, two-third of money managers finds the U.S. stock market’s recent record run unsettling. The dizzying ascent of U.S. stocks as a result of lofty valuations might sooner or later trigger a major sell-off.
The major tech stocks from the ‘FAAMG’ family have surged 36% year to date after posting third-quarter results. Such instances have led investors to doubt whether the markets are correctly valued. Moreover, the S&P 500 is about 39% overvalued. The benchmark currently trades at 27.3x P/E 10.
The stocks have also been boosted by strong corporate earnings this year. As of Nov 3, 406 S&P 500 companies, which account for 85.4% of the index’s total market capitalization, reported Q3 earnings. Total earnings for these companies are up 7.5% from the same period last year on 6.3% higher revenues, with 73.9% beating EPS estimates and 66.7% beating revenue estimates. (Read More: The Tech Sector's Impressive Earnings Power on Display)
Stock overvaluation has been largely overshadowed by hopes of tax reforms. While we expect the markets to continue the good run for the remainder of 2017, analysts believe that if the tax-reforms are not around by 2018, there might be a market crash. This is because there would not be any driving force to bolster the markets any more. Such a scenario leads one to infer that the gains will be largely momentary. Under such dubious conditions, investing in equity stocks for long-term dividends might turn out to be fatal.
Time to Buy High-Yield Bond Mutual Funds
We therefore suggest investors to consider placing their money on high-yield mutual funds instead. Thanks to the aforementioned factors, this year is certainly threatened by uncertainty, which calls for investing in high-yield paying mutual funds. Companies that pay high dividends put a ceiling on economic uncertainty. These companies have steady cash flows and are mostly financially stable and mature, which help their stock prices to increase gradually over a period of time. Moreover, dividends are less taxed as compared to interest income which helps one’s portfolio to grow at a compounded rate and stay protected against earnings manipulation.
We have selected four mutual funds that offer a dividend yield of more than 3%, allocate more than 70% of its holdings in stocks, have impressive year-to-date (YTD) and 3-year annualized returns, boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), offer a minimum initial investment within $5,000 and carry a low expense ratio.
The question here is why should investors consider mutual funds? Reduced transaction costs and diversification of portfolios without several commission charges that are associated with stock purchases are the primary reasons why one should be parking their money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
Dreyfus High Yld I (DLHRX - Free Report) seeks to maximize total returns. DLHRX invests at least 80% of net assets in fixed-income securities that are rated below investment grade (high yield or junk bonds) or are the unrated equivalent as determined by Dreyfus.
DLHRX has an annual expense ratio of 0.70%, which is below the category average of 1.03%. The fund has three-year and YTD returns of 4.2% and 6.6%, respectively.
Principal High Yield A (CPHYX - Free Report) seeks to offer growth of income. CPHYX invests a bulk of its assets in below investment rate bonds or high yield bonds future rated Ba1 or lower by Moody's and BB+ or lower by S&P Global. Principal High Yield A returned 14.2% over one year.
CPHYX has an annual expense ratio of 0.90%, which is below the category average of 1.03%. The fund has three-year and YTD returns of 5.3% and 7.2%, respectively.
Fidelity Capital & Income (FAGIX - Free Report) primarily focuses on acquiring debt securities that are rated below investment grade. FAGIX also invests in equity securities of companies that are facing unfavorable financial conditions throughout the globe. Factors such as industry position and economic condition are considered before investing in a security.
FAGIX has an annual expense ratio of 0.73%, which is below the category average of 1.03%. The fund has three-year and YTD returns of 6.5% and 10.7%, respectively.
Thrivent High Yield A (LBHYX - Free Report) invests the majority of its assets in high risk, high-yield bonds and other debt securities. LBHYX seeks growth of capital and income. The fund invests mainly in junk bonds.
LBHYX has an annual expense ratio of 0.81%, which is below the category average of 1.03%. The fund has three-year and YTD returns of 4.4% and 6.7%, respectively.
Nuveen High Income Bond A (FJSIX - Free Report) invests the majority of its assets in lower-rated bonds. The fund may also invest a maximum of 20% of its assets in fixed and floating rate loans. Further, it may invest in exchange-traded funds, closed-end funds and investment companies.
FJSIX has an annual expense ratio of 1.01%, which is below the category average of 1.03%. The fund has three-year and YTD returns of 3.1% and 6.7%, respectively.
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