The recent threat of Fed "tapering" has been putting many investors on edge lately -- hence the triple-digit market swings we experienced last week.
This is exactly the sort of "conventional wisdom" myth that costs investors big time over the long run. And I'm certain you'll see it pushed in the mainstream financial media soon.
The official transcript of Federal Reserve Chairman Ben Bernanke's press conference two weeks ago contained 7,267 words, but the 10 that stuck out most to me were: "If the incoming data are broadly consistent with this forecast..."
Before the Fed slows down its money-pumping asset purchase program, it wants to see two key green lights first: 1) U.S. economic growth (measured in GDP) between 3.0% and 3.5% in 2014, and 2) a U.S. unemployment rate between 6.5% and 6.8%, down from today's 7.6%.
That said, I think we have a ways to go to get to that point for this year and 2014.
The first quarter results for U.S. GDP came in at 1.8% annualized -- well below the 2.4% economists had been expecting, and I don't expect the second quarter to be much better.
Overall, I project GDP to grow at a 2.5% to 3% pace next year. But for the rest of this year, I'd look for fears of Fed tapering to recede as U.S. economic data falls short of expectations over the next couple of months.
As for the market, I have been looking for a 5% to 10% correction for the S&P 500 for some time and I think that may continue into the summer with threats of a slowdown in emerging markets like China.
But as the U.S. economy shows signs of acceleration in the final months of 2013, I am looking for the market to pick up steam again.
With that said, one of the of the biggest myths making the rounds in the market today is income-oriented stocks underperform when interest rates are rising.
That's the sort of wrong-headed conventional wisdom that costs investors thousands in the long run.
The best MLPs exhibit some of the key traits I look for in an investment: strong yields, the potential for significant growth in distributions over time, and leverage to secular growth in U.S. energy production, thanks to rising output from shale plays such as the Bakken Shale of North Dakota.
Between mid-2003 and mid-2007, the yield on the 10-year Treasury bond rose from about 3.1% to 5.3%, thanks to the U.S. economy's recovery from the 2001 recession and a series of Fed rate hikes. Over this time, the S&P 500 soared 66% but MLPs almost doubled that, returning 120%.
That flies in the face of the conventional wisdom often spouted in the financial media lately about high-yield stocks underperforming in rising rate environments.
More recently, one of my favorite MLP plays, the JPMorgan Alerian MLP Index ETN (NYSE: AMJ) -- which tracks the 50 most prominent energy MLPs -- soared nearly 24% in the first six months of this year, its best half-year start, ever.
Sure, valuations in the group look stretched at the moment with all the money pouring in from yield-starved investors. And even as MLPs have boosted their payouts, the yields on many of the larger, better-known MLPs have sunk to their lowest levels in years.
Action to Take --> Even so, the average MLP still offers a yield of around 5.7% right now. And recent concerns over higher rates caused by the Fed's actions could push MLP valuations down from here, handing investors a stellar buying opportunity. And that could mean more rising yields down the road for income investors who take advantage.