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When Everything Is Working, Sit Tight

What can I say? Well, for one thing, it's been a great three years for income investors, and the picture still looks bright.

Precisely three years ago, I began this column by identifying 10 income categories that were defying a tide of pessimism and showing positive year-to-date returns. The list of losers? A blank space. Fast forward to today. As that eminent market strategist Lawrence “Yogi” Berra might have said, it’s déjà vu all over again.

Look at 2017 returns and you’ll see green everywhere. Through April 30, the Dow Jones utility average delivered a total return of 6.7%. The Bloomberg Barclays index of triple-B-rated corporate bonds showed a profit of 2.6%, and Standard & Poor’s medium-term municipal index was up 2.5%. S&P’s broad gauge of preferred stocks gained 6.5%. Treasury debt with maturities from 30 days to 30 years was profitable. I could go on, but you get the point.

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The worst strategy was keeping your money in the bank (or under a mattress) due to fear. In truth, six months ago I could understand income investors’ angst. Donald Trump’s election created expectations that giant tax cuts, growth-oriented legislation and “animal spirits” would quickly wrest control of the markets and the economy from bondholders and dividend clippers and transfer it to bankers and beneficiaries of enormous infrastructure spending. Municipal bonds, at special risk from a massive income tax cut, plunged for a few weeks in November and December. The jig was also thought to be up for utilities. Investment advisers chased after stuff able to withstand a spike in interest rates. So stocks of lenders, builders, makers of materials, and transportation companies went wild.

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But it is senseless to invest, reinvest or disinvest on hopes, wishes and unformed story lines. The government’s tax and economic ideas are fluid and incomplete. Investors seem to understand that, and markets have reverted to reacting to reality, not pipe dreams.

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All of this is good news for investors of all stripes, and for income investors in particular. The bull market in U.S. stocks remains intact, and the worst you can say for bonds and other income investments is that their prices are moving in a narrow range. Consistently high demand for yield-oriented investments of all sorts is keeping prices up.

Plenty of pluses. It’s true that many stock-oriented income categories are expensive relative to profits and other key measures. But the big picture looks bright. Banks are sound. The dollar is strong. The Federal Reserve is at peace with current inflation and employment readings. The world’s other important economies aren’t about to crater and take us down with them.

I recently ran my thesis past several money managers who specialize in income investments. To a person, all agreed that the benign state of affairs is likely to last far longer than most people think and that chances of a 2008-like bonfire are remote. All agreed that there’s no reason to disturb a diversified portfolio of high-quality assets or to radically reduce bond maturities in anticipation of higher interest rates (bond prices and rates move in opposite directions).

Kiplinger’s economic forecast buttresses the case for sitting tight. We expect gross domestic product to increase by 2.1% in 2017, roughly in line with the growth rate since the Great Recession ended in 2009. And we see the benchmark 10-year Treasury bond, which currently yields 2.3%, rising to only 2.7% by year-end. That kind of environment is just fine for income investors. No wonder municipals, preferred stocks and both mortgage-owning and property-owning REITs are doing great again.

There’s a good chance that someday I’ll be able to use the introduction to this column a third time. I sure hope so, because it will mean that we’re in excellent financial shape.

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