After Sandy: Now What?

In the first day of trading after Hurricane Sandy pounded New York, the S&P 500 had its best trading day in seven weeks.

I’m not one to assign a lot of significance to a single day’s trading, but I did find it encouraging.  It suggests that the damage left behind was less severe than the Street feared.  Life is already returning to normal in Manhattan, and power and transport are being restored bit by bit.  The damage tally will not be small, and the disruption will likely take a bite out of 4^th quarter GDP.  But the rebuilding efforts should create a nice jolt in economic activity leading into the new year.

Stocks have been stuck in a sideways pattern for the better part of the past two months, as a string of disappointing earnings releases and economic data kept a lid on investor enthusiasm.  But with the bad news now mostly digested—and with the Fed, the ECB and the rest of the world’s major central banks still maintaining the loosest collective monetary policy in history—I expect the animal spirits to return for the last two months of the year.

Sizemore Capital has been pleased with the performance of our Dividend Growth and Sizemore Investment Letter models at Covestor.  Both are beating the S&P 500 for the year without taking significantly more risk.  In a year like 2012, when so much is determined by macro and political risks outside of the control of company managements, an income-focused strategy is the only strategy that makes sense.

Within the Dividend Growth portfolio, we are focusing most heavily on mid-stream oil and gas partnerships and conservative triple-net retail REITS.  In our view, these sectors are attractively priced and throw off healthy amounts of cash.  These are investments we would be happy to hold for the next 1-5 years, come bull or bear market. Given the current pricing of bonds and other mainstream income investments, we expect these investments to outperform by a wide margin with very little risk of principal loss.  In many cases, dividend yields are well in excess of 5%—not a bad income return in a low-yield environment.

The Sizemore Investment Letter portfolio is slightly more speculative and is not limited to a pure income focus (strong dividend growth is one of many investment criteria covered).  In this portfolio, we see the greatest opportunities in European blue chips with substantial operations in emerging markets.  As the European Union slowly congeals into a more “American” style federal system, we see investor risk appetites for European stocks returning.  And in the meantime, we get access to high emerging-market growth rates and a steady stream of dividends.

You can view our Covestor profile here.