After posting its worst yearly performance since the financial crisis in 2018 (-6.2%), the S&P 500 just posted its best January since 1987 (+8.01%). This illustrates how volatile markets are now. Our February newsletter focuses on three investment opportunities to consider in today’s market climate. In addition, we provide the latest monthly commentary from Pacific Asset Management.
Investment Opportunities in Today’s Market Climate
Multifamily Real Estate investing
Multifamily rental housing is a common form of housing in the United States that presents a unique investment opportunity with low correlation to the economy and stock market. Multifamily real estate investments generally focus on income producing properties with low/defensive risk profiles.
Demand for multifamily rental units remains high. Research from the Urban Institute predicts that from 2010 to 2030, we will see five new renters for every three new homeowners.
There are significant barriers to homeownership that favor renter and multifamily demand:
- Millennials are drowning in student loan debt. According to the Federal Student Aid Office report from Q1 2018, there are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt.
- As interest rates rise, it becomes more expensive to borrow money to buy a home.
- Increased costs associated with home ownership (land, labor, overall construction costs).
Investing passively through a fund focusing on multifamily investment properties offers the ability to co-invest with professionals and diversification in asset types, geography, and business plans.
A covered call option strategy can help to control and reduce risk on a stock or exchange traded fund (ETF) you already own. A covered call strategy is best suited for those with concentrated stock positions and for income-oriented investors. In particular, we have identified employee’s of publicly traded companies with accumulated stock compensation can benefit from a covered call strategy.
In a Covered Call transaction, you are simply giving someone else the right to buy your investment in exchange for cash paid today. This cash provides immediate income and the potential for downside protection for the investment you own.
For a detailed explanation on Covered Calls, please read Charles Schwab’s article – Reducing Your Exposure with Covered Calls
Short Duration Income
The rising interest rate environment has created investment opportunities within the short duration income space. The US Federal Reserves objective to normalize monetary policy (largely by raising interest rates) has caused short-term interest rates to rise dramatically, leading to a flattening yield curve (see below chart).
When comparing today’s US treasury yields (annual), the 2-year US treasury yields 2.52% versus 2.70% for the 10-year US treasury. This means you are only receiving an additional 0.18% per year for the 8 year difference. This environment creates an opportunity for investors to reduce risk by lowering their portfolios duration/maturity.
Currently, you can find a number of banks offering 2% or more on savings accounts. It is worthwhile to shop around for the best savings rates available. You can get started by visiting Nerdwallet.com’s Best Saving Accounts of February 2019
For more information on short duration investments, please visit Lord Abbett’s article on Gauging the Opportunity in Short Duration Credit.
Please contact us to explore these investment opportunities based on your personal goals and objectives.
Pacific February Monthly Commentary
Our partners at Pacific Asset Management share their latest Market Commentary. Please click the link below to read the latest monthly commentary: