Five months ago (July 19th), the S&P 500 established a new ATH at $3,386.14. Five weeks later, it "bottomed out" at $2,237.40, down nearly 34%. Today it sits at $3,224.73... just 4.7% below the February All-Time High. Nasdaq ("déjà vu 2000 all over again") has been striking new ATHs, while the DJIA remains nearly 10% below its February high. The number of days where down issues exceed up issues is increasing... 

How have the averages rallied so strongly, and why aren't properly diversified, balanced portfolios, right up there with them? 

• The main reason is that all of the market averages are equity only measurements, while properly diversified portfolios are not just invested in equities... and, possibly because the casinos have been closed!
• Secondly, just six individual stocks make up 20% of the S&P average (the FAANG Stocks + Microsoft).
• Finally, just two sectors (Information/Technology and HealthCare) account for 41% of the S&P, 37% of the Dow, and nearly 60% of NASDAQ. (That should be an eye-opener for all but the most hardened speculators).
• No one seems concerned about the misleading nature of the overall "market" numbers.
• In spite of their lofty levels, the securities inside the averages pay well under 2% in average annual income.

 If any professional money manager had this many eggs in just two broad sector baskets, or only six stocks (12 in the DJIA), lawyers would be lined up from coast to coast just to sue his derriere when the bubble bursts... as they always have.

Closed-End Equity and Balanced Funds (CEFs) are diversified portfolios that contain an average of over 200 equities... including some FAANG, MSFT, health care companies, dividend "achievers", "aristocrats", and "champions". But clearly, based on their slower than the averages rise from the March 27th low, they are not over-concentrated either in just six companies or only two sectors. Historically, a much safer approach.

Also, while equity and balanced CEFs are not at speculative bubble valuations, they are constantly and consistently "producing" four times as much spending money than the "averages" in total. They generate a current yield of more than 9%, while still priced at a level more in line with the economy, a global pandemic, and political/social unrest. 

CEFs are better diversified in every way than either NASDAQ, DJIA. or the S & P 500... thus the higher income levels and slower growth in market value.  For broader picture investors, this means a longer stretch of high opportunity to reduce cost basis and increase portfolio yield on invested capital. 

During the correction so far, nearly 300 individual equities have cut, suspended, or omitted their dividends; 40 ETFs cut their dividends in July alone. Through July, only 27 equity and balanced CEFs (in my 90 CEF selection universe) have reduced their distributions; there have been no suspensions or omissions.

Equity and Balanced Closed-End Funds

Equity and balanced CEFs are properly diversified portfolios, with hundreds of individual companies inside. So, yes, there will be a correction in both CEFs and most equity sectors until the market measures themselves become properly diversified once again. The averages, over-weighted as they are in Technology & Healthcare, are looking more and more like they did in 1999, just prior to the "Dot Com" bubble bursting. At that time, just 12 stocks accounted for the entire annual gain in the S & P 500; the majority of stocks were down.

• 65% of the equity and balanced CEFs I follow are paying the same distributions they were in February, one is paying more. Three funds actually raised their distributions in July, the most since February.
• The current yield on the 27 CEFS that lowered their distributions since February is approximately 9.85% vs. roughly 9.4% for the 64 who have not had any decrease. Less than half of the management companies involved have reduced fund distributions during the correction.
• The average CEF in this universe has been in operation nearly 21 years.

Income Closed End Funds

It is not uncommon for market analysts to compare all investments with the market averages. It is also not uncommon for me to field questions from people wondering why their 60% to 100% income purpose portfolios have not risen in market value along with the market averages. The very forces that produce "irrational exuberance" in certain stock market sectors are the forces that weaken demand for, and interest in, income purpose securities.

This fact of investment life, if you will, has always produced investment opportunities outside the popular equity sectors, and even more so in the income purpose area... particularly income Closed End Funds. These distribution machines give us the ability to trade illiquid securities (bonds, loans, mortgages, preferred stocks, real estate, etc.) in liquid form!

• Of the 112 income purpose CEFs in my selection universe, 64% of the distributions are either unchanged or higher; the yield on the 40 that have experienced distribution reductions remains above 9%, but not quite as high as those which have made no reductions at all.
• 19 companies have not reduced distributions in any of their funds; 31 of the remaining 40 have reduced just one. Only four of the CEFs with reduced distributions have a yield below 7%; none below 6%. Still well above that provided by the vast majority of ETFs, and Mutual Funds.
• The number of funds increasing their distributions has increased the past three months (four-six-nine); eight of the nine increases in July were in funds that had previously reduced their distributions.
• The portfolios in this particular universe have been in operation for an average of more than 15 years.

A "Perceived Top Of The Market" Strategy

If (or when) the current market repeats its movements of twenty years ago, don't be caught holding a greed filled bag of a few overpriced securities and sectors. Start taking your profits in securities that provide nearly nothing in income and reinvesting in diverse portfolios of equity and income securities that are producing an average over 9% in totally "in-your-pocket" distributions... while they are still at bargain prices.