The One Mutual Fund I Would Buy Right Now
As the Chief Investment Strategist for Personal Finance, I get asked a lot of questions. The one I get the most is, “Which way is the stock market headed next?”
Of course, there is no way of knowing the answer to that question. I know which way I think the stock market is headed over the next few months. Only time will tell if I am correct about that.
However, I do know the answer to another question I get a lot: “If you could only buy one mutual fund right now, which one would it be?” In a moment, I’ll give you my answer. But first, I’ll address the first question since it directly influences my response to the second question.
I believe the overall stock market, as measured by the S&P 500 Index, is headed lower over the next couple of months. Lately, the financial news has been dismal. Unemployment is surging while economic productivity has fallen off a cliff.
Yet, through the end of last week the S&P was down less than 9% this year. That doesn’t even qualify as a correction despite the huge drop in corporate earnings that is taking place.
First quarter results were bad for most companies. Second quarter results will be considerably worse. And if there is a spike in COVID-19 this summer after social distancing restrictions are lifted, the second half of this year could also be a mess.
I don’t know if the stock market’s remarkable resilience is due to nothing more than optimism, irrational exuberance, and/or denial. Regardless, by any rational standard the S&P is overvalued by a fairly wide margin.
I’m not expecting a crash. However, a drop in the 10% – 20% range would not surprise me at all.
A lot of the money going back into the market recently has been invested in mega-cap tech stocks. That makes sense; most of them were largely unaffected by the coronavirus pandemic during the first quarter.
At this point, many of them appear overvalued to me and likely to pull back next month as the second quarter draws to a close. In March, consumer spending fell by 7.5%. And that was before things really got bad.
The unemployment rate for the month of May is expected to rise above 20% when that figure is reported next month. Some experts believe it could as high as 25%. And if you think consumer spending was bad in April, it could be a whole lot worse in May.
For that reason, I believe the White House and Congress will finally pass a major infrastructure spending bill this summer. People need jobs, and the federal budget cannot afford any more handouts without getting something back in return.
If I am right about that, then the simplest way to profit is buying shares of the SPDR S&P Global Infrastructure ETF (GII). This fund is comprised of utilities (46%), industrials (36%), and energy companies (18%).
Since peaking above $57 in February, GII fell below $33 in March before rallying back above $40 in April. Since then, it has been stuck in a narrow trading range near $42.
The passage of an infrastructure spending bill could quickly push GII over the $50 mark. That would be a gain of 20%, in addition to its annual dividend yield of 4.4%.
That is why GII is the one mutual fund I would buy right now if I could only buy one. It is low-risk, high-yield, and still has plenty of upside potential left in.
A Lot of Bull
Making the bull case for GII is easy:
- Demand for utilities will increase as soon as the economy roars back to life.
- The energy sector should rally as oil prices continue to rise over the summer.
- Passage of an infrastructure bill could trigger a surge in heavy equipment sales.
Making a bear case for GII is considerably more difficult.
- Even if the economy takes longer than expected to recover, demand for essential services such as electricity and water should be largely unaffected. Plus, most regulated utilities are protected and can adjust pricing to ensure profitability.
- As for the energy sector, oil prices can’t go much lower than where they were a month ago. A recent Forbes article pegged the fiscal break-even price of oil for Saudi Arabia at $91/barrel. That is nearly twice the $48 breakeven level for the U.S. That means the oil price war is hurting them far more than it is hurting us.
- The biggest question mark surrounds industrial stocks that rely on big-ticket items for most of their revenue. If no infrastructure bill is passed, many of them will most likely languish until the economy is back on its feet.
To my way of thinking, the worst-case scenario for GII is roughly a push. In that case, the 4%+ dividend yield still makes it worth owning.
But if I’m right about how the second half of the year will go, GII could handily outperform the overall stock market.
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