Recession Chances Reach 100% (And That 7.3% Dividend Can’t Wait)

A recession is on its way – and are stocks… rallying? This makes zero meaning on the surface, but there is good reason for the rebound we’ve seen this week. And we’re going to play with a fund paying 7.3% which should rise with a recovering market.

No, we are not talking about an index fund like the SPDR S&P 500 Trust ETF (SPY

P.Y.

TO SPY
). My colleague Brett Owens calls SPY “America’s ticker” for good reason: just about everyone has it!

Instead, we’re going with a fund that pays us a 7.3% dividend today. That’s more than 4 times SPY’s meager 1.7% payout. And this fund profits volatility which, despite the rebound, should persist.

More on this unique fund in a second. (Tip: You drop the “Y” into the “SPY” ticker and add an “XX”.)

First, I want to give you my outlook for this new market rally.

The result ? What we have in front of us now is a near-perfect setup for the fund we’ll discuss below – a special type of fund called a “covered call fund”.

Memories of past recessions

You’ve probably heard the media tweeting about the latest prediction from Bloomberg Economics: that we are facing a 100% chance of a recession in 2023.

Honestly, they’re probably right, but that prediction is less important than the fact that, unlike any recession in a generation, the pain is already priced into stocks.

Consider that in the first 12 months leading up to the 2008 crisis, the markets were buzzing. The S&P 500 rose more than 10% in one year before beginning to falter in late 2007, and even then it didn’t enter bearish territory until late 2008.

This time around, however, the benchmark is good down (as we know!), suggesting that a recession is already priced in.

With the S&P 500 already in bearish territory, stocks priced in a recession before the onset of the recession. This means that an economic contraction is the base scenario for the markets. The other side of the coin, as we mavericks know, is that any a slight brightening of the outlook is enough to trigger a recovery.

And there’s reason to believe that the picture might indeed be brighter than the markets believe, giving us a better chance of a nice upside (with a 7.3% dividend “side”, as we’ll get to that in a second).

Let me show you where this good news can come from, starting with the country’s debt chart.

Debt worries are only half the story

As interest rates rise and debt becomes more expensive, a review of debt balances should be our first stop in determining the health of the US economy. And on this scale, total debt is just over $16 trillion, up from $11.4 trillion a decade ago. That’s a 42% increase in just 10 years.

But debt only gives you half the picture. Let’s say I told you I knew someone who borrowed $6 million to buy a house. Based on that information alone, you might think that this person was in debt due to overspending. But if I told you that man was Mark Zuckerberg, and that $6 million was a microscopic portion of his net worth, you would have a different opinion. The point here is that we must always look at debt versus wealth.

So let’s do that.

Wealth is skyrocketing, even with the hindsight of 2022

Clearly, falling stock and bond prices have hit the country’s wealth this year, but even so, the net worth of all American households has soared to $136 trillion, a gain of 108% in a decade. It also means that the average American is a third less in debt than they were ten years ago.

Yes, the interest rates on these debts are getting more and more expensive, but Americans are in a better position to manage these debts than they have been throughout history. That’s why a slowdown in the economy, even a deep and steep recession, is likely to be less painful in 2023 than it was in 2008.

But you would never know by the performance of the market this year.

Thinking back to the Great Depression, only five years on record are worse than 2022. And if we remove the years before World War II, only two years are worse than this: 1974 and 2008. Of those two years, 1974 most closely resembles 2022. At the time, an OPEC embargo was causing an energy shortage in the United States, as well as shortages of all kinds of goods.

The difference today is that we have already seen signs of easing shortages, especially for food and fuel (the main drivers of inflation in the 1970s). Meanwhile, America now generates more oil than it uses, meaning an OPEC embargo is no longer a concern today. We can see this in the recent drop in oil prices.

So where does this leave us? The long-term trend of a lower debt ratio, higher incomes, lower energy prices and higher productivity are signs that a US recession could be milder than what is currently planned.

And we CEF investors are lucky to have a way to make a profit: covered call funds like the one we’re going to talk about now..

Take advantage of volatility and recovery with SPXX

The Nuveen S&P 500 Dynamic Replacement Fund (SPXX) is like SPY “America’s ticker” in a way: it owns all the stocks in the S&P 500, as the name suggests.

This means you may not need to change your current investments to get SPXX and its 7.3% dividend. Simply “exchange” your current holdings into Microsoft

MSFT
(MSFT), Apple

AAPL
(AAPL),
Visa

V
(V)
or whatever for this fund.

You also get these actions after they have sold and are rated for a major recession. Additionally, SPXX’s income stream is supported by the fund’s covered call strategy, which benefits from higher volatility. (Under this strategy, the fund sells call options on its portfolio and earns cash bonuses in return, regardless of the outcome of the options trading.)

It’s a good setup for now, with a (still) oversold market and a good chance for near-term volatility, as uncertainty continues to hang over the Fed’s next moves.

Michael Foster is the Principal Research Analyst for Opposite perspectives. For more revenue ideas, click here for our latest report »Indestructible income: 5 advantageous funds with stable dividends of 10.2%.

Disclosure: none

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