by Bryan Perry

May 10, 2022

Last week, the bond market voted thumbs down to the Fed’s 50-basis point rate hike as Treasury yields initially paused, but then summarily traded to their highest levels since the fourth quarter of 2018.

From this 20-year chart of yields on the benchmark 10-year Treasury Note, the quick rise to a closing yield of 3.14% last Friday reflects an unprecedented break above the trend of the past 20 years.

Ten-Year Treasury Note Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Just a couple of weeks ago, the yield curve was inverted, sounding recession alarm bells around the globe. Since then, the curve has somewhat normalized as yields have pushed higher across the entire curve. One such indicator that gets a lot of attention – the 2/10 spread – is now up to 39 basis points.

The latest bump in yields was prompted by Friday’s jobs report that showed a lower Labor Force Participation Rate than forecast, raising concerns about wage pressures persisting against a report of record job openings. Looking at the CME FedWatch Tool, the Fed funds futures market is still assigning a 78.6% probability of a 75-basis point rate hike at the next (June) FOMC meeting.

This week, investors will digest the release of the major inflation indexes (the CPI and PPI). The CPI is forecast to come in at just 0.2% and the core PPI at 0.6%, which would represent a meaningfully smaller increase than what was registered for March and thereby help lower the bond market’s blood pressure.

United States Treasurys Table

At this point, investors will take any sliver of good news that is fit to print, and a cooling of inflation rates would be a major headline for the market to embrace. However, a tamer set of inflation numbers alone won’t fix the same issues that have been (and will continue to be) stiff headwinds. The prolonging of the Ukraine war, the continuing zero-tolerance lockdown against COVID in China, and the clogged supply chains will keep prices high for gas, food, and most everything that consumers and businesses depend on.

First-quarter earnings season has been healthy but with mounting evidence of slowing economic activity.

According to FactSet, in their latest (Friday, May 6, 2022) commentary, here are the latest earnings data:

“Overall, 87% of the companies in the S&P 500 have reported actual results for Q1 2022 to date. Of these companies, 79% have reported actual EPS above estimates, which is above the five-year average of 77%.

“Looking ahead, analysts expect earnings growth of 4.8% for Q2 2022, 10.6% for Q3 2022, and 10.1% for Q4 2022. For CY 2022, analysts are predicting earnings growth of 10.1%. The forward 12-month P/E ratio is 17.6, which is below the five-year average (18.6) but above the 10-year average (16.9). It is also below the forward P/E ratio of 19.4 recorded at the end of the first quarter (March 31), as prices have decreased while the forward 12-month EPS estimate has increased over the past several weeks.”

Standard and Poor's 500 Price to Earnings Ratio Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In the midst of this current market pullback, there is a growing sentiment that Gross Domestic Product (GDP) growth will slow, and inflation will remain high. FactSet’s forward earnings forecast is looking for earnings to trough in the current (second) quarter at 4.8% and rebound to over 10% in Q3 and Q4. I’m not sure where their level of optimism stems from, unless they believe some current pressures are lifted. If they are right, the market should be near bottom. But any such positive forecast seems highly speculative.

For income investors seeking inflation-friendly income, I highlighted some energy MLP ETFs last week. They pay substantial yields with no K-1’s to report. Those remain “sweet-spot” income vehicles in this market. This week, I’ll add covered-call ETFs and closed-end funds that have pulled back with the broad market. They also sport current yields that are beating anticipated levels of inflation.

Market volatility produces extreme option prices, so when selling option premiums back to the market in the form of covered calls, it affords fund managers the ability to generate higher option-income-related yield. There are many covered-call ETFs and closed-end funds that use a variety of stocks, preferred stocks, leverage, option overlay percentages, indexes and derivatives to create yield – so spending some time doing due diligence before buying any fund is highly recommended.

A couple of the funds that have portfolios weighted in stocks that are in the more favored sectors include:

  • InfraCap Equity Income Fund ETF (ICAP) — pays out distributions monthly
  • JPMorgan Equity Premium Income Fund (JEPI) – also pays distributions monthly

Ideally, finding a covered-call fund that sports an attractive yield, such as these two, but still leaves room for upside if the market starts to trend higher again, is as close to having your income cake and eating it too as one can get, with the potential for capital appreciation. Staying on top of inflation when it’s running hot is no easy task, but in a sideways-to-lower market that is very narrow and picky about which stocks will win and lose, deriving a fat yield from volatility is one way to beat back the inflation demons.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
On The Threshold of Bond Market History

Sector Spotlight by Jason Bodner
It’s Only Money – and It Will Likely Return

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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