Weekly CEF Market Report - April 25, 2021
Macro Picture
Stocks showed some volatility but ended the week little changed amid light volume. Small caps finally led again while tech stocks lagged a bit. No particular theme lead this week- which is a stark difference from the seesaw we've been seeing for the last few months between reopening trades/cyclicals and stay-at-homes/growth.
The big news on the week was the floating of a new capital gains tax that would nearly double the rate for high earners ($1mm+). President Biden wants to use the funds to pay for his infrastructure plan and also "Families Plan." Stocks plummeted on the news but recovered later in the week.
Economic data came in strong with PMIs looking good and jobless claims reaching a pandemic low. We also saw existing home sales fall 3.7% but that was primarily due to very low supply and strong demand pushing the median sales price to a record high in March.
Yields fell slightly on the week mostly because of the capital gains tax increase news supported a flight to safety trade.
Commentary
Discounts widened out a bit this week, which isn't all that surprising given the VIX rose back above 18 from a post-pandemic low near 16. While it doesn't sound like much, the capital gains "scare" last week caused a bit of selling and flight to safety- something like we haven't seen in some time. We also have global Covid cases rising rapidly which may also be tempering some enthusiasm for risk assets. Lastly, several banks (JP Morgan most notable) came out this week and said that higher yields threaten the rebound and that enthusiasm is way too bullish.
I would expect that the easy money has been made here and that going forward it will be a hard fought battle for these types of returns from fixed income based assets.
I'm extremely happy where we are YTD on the Core Income Portfolio. Below is the no-muni version which seems to be the more popular one since so many members are retired and have lower income tax liabilities.
We are now up +9.21% YTD through Friday. The regular Core Income Portfolio that includes munis is now up +8.22%. Over the last three years which includes two bear markets, the portfolio is up 7.3% annually including distributions. Not bad.
The mutual funds are doing "okay" but still better than the index with the YH OEF names up nearly 1% YTD compared to a -2.9% for the benchmark.
One of the main problems going forward is that the number of CEFs is shrinking quite rapidly but luckily we are seeing a bunch of new funds come to the market. But the new funds aren't coming out nearly as quickly as those merged away or liquidated. This is decreasing the supply of total bond funds at the same time when demand is picking up.
As I noted a few times in the last couple of weeks, I do think muni valuations will pass taxable bond CEF valuations. Meaning that I think the avg discount on a muni CEF will eventually be tighter than taxables at some point this year- this despite the threat of a taper tantrum later this year.
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