2016-Q3 Quarterly Update
October 10, 2016
Dear Mr. and Mrs. Smith
The major stock markets had their best performance this year in the third quarter 2016. The S&P 500 hit an all-time high of 2190.15 on August 15th before ending the quarter at 2168.27. U.S. Treasury yields rose modestly with 10-year Treasuries rising from 1.47% to 1.60% and 30-year Treasuries rising from 2.29% to 2.46%. The stock market is currently focused on the upcoming elections and the possibility of an interest rate hike by the Federal Reserve. We continue to believe the Federal Reserve will be constrained by global conditions, with stocks slowly transforming from low interest rate driven growth to earnings driven growth. We believe the stock market will continue to move higher for years to come continuing the longest bull market in U.S. history.
All of TIA’s stock portfolios rose in the third quarter with the Income Equity Portfolio (IEP) leading the way with a year to date return of twice that of the S&P 500 total return index. We expect earnings to increase from now to year’s end and we believe our portfolios are well positioned for this. The return of profitability to the energy sector may be the catalyst we need to achieve our year-end target of 2216 for the S&P 500 Index.
While interest rates have risen modestly this quarter we don’t see a rapid change as imminent. Remember, we started this year with predictions of four rate hikes this year. Global conditions have prevented any hikes so far this year, and while a small raise is possible between now and year-end, the Fed cannot risk contradicting other Central Banks’ policies for fear of harming our economy. This is why TIA has been investing in preferred stocks in lieu of bonds for almost eight years. Our Preferred Income Portfolio (PIP) is a unique fixed income portfolio with a current yield of 6.54%, which is over 4% higher than the 30-Year US Treasury bond. We believe this interest spread will provide PIP a margin of safety when interest rates reverse and begin to normalize. TIA continues to believe that interest rates will stay lower longer than in previous credit cycles.
TIA has developed preferred portfolios for many of the objectives of fixed income investing. PIP is an income focused, diversified portfolio suitable for most investors. Non-Cumulative Preferred stocks have a tax advantaged yield making them a higher yield alternative to municipal bonds. Our Shorter Call Preferred stocks attract investors looking for a higher yield alternative to a short-term bond portfolio. Preferred stocks allow us the flexibility to build a portfolio to meet your individual need. We feel these investment tools continue to be well suited for this uncertain environment which we see continuing for the foreseeable future.