2024: A Stellar Year for US Stock Investors
The year 2024 has proven exceptionally fruitful for US stock investors, with the S&P 500 surging by an impressive 28% year-to-date. This remarkable performance surpasses even the most optimistic projections and places 2024 among the top-performing years in the last two decades, rivaling the gains seen in 2013 and 2019. Notably, this year’s rally is not solely fueled by the technology sector, as seen in previous bull markets. The Technology Select Sector SPDR ETF (XLK) trails the broader market with a 24.5% return, indicating a more balanced and fundamentally driven recovery across various sectors. This contrasts with the tech-heavy rallies of the past and suggests a healthier market environment, less prone to speculative bubbles. The 2024 surge is likely a corrective rebound from the 2022 selloff, which was largely based on recession fears that ultimately did not materialize. This fundamental recovery reinforces the market’s resilience and underscores the potential for continued growth.
Considering International Investments: A Cautious Approach
While the US stock market flourishes, investors may consider diversifying into international markets. Historically, international stocks, as represented by the iShares Core MSCI Total International Stock ETF (IXUS), have underperformed the S&P 500. This long-term trend stems from generally higher profitability among US companies, leading to premium valuations. Therefore, direct investment in international stocks or through traditional ETFs should be approached with a shorter-term perspective, acknowledging the historical performance gap. However, a more nuanced approach involves leveraging closed-end funds (CEFs) specializing in international stocks.
The CEF Advantage: Discounts and Dividends
CEFs offer a distinct advantage through their tendency to trade at discounts to their net asset value (NAV) and their typically high dividend payouts. These discounts create an opportunity for investors to acquire assets at a reduced price and benefit from the potential for discount narrowing, which can boost returns. Additionally, the high dividend yields, often averaging around 8%, provide a steady income stream while waiting for the discount to close. The BlackRock Enhanced International Dividend Trust (BGY) exemplifies this strategy, with its discount narrowing from 15% to 9% in 2024, contributing to a 13.5% total return, primarily driven by its generous 9.1% dividend yield.
Balancing Act: International CEFs vs. US-Focused Investments
While select international CEFs offer compelling opportunities, it’s crucial to maintain a balanced approach, considering the long-term underperformance of international markets. As discounts narrow, the appeal of these CEFs diminishes, warranting a shift from "buy" to "hold" and eventual profit-taking. The Adams Diversified Equity Fund (ADX), a US-focused CEF, demonstrates the potential of domestic investments, boasting a 30.6% year-to-date return, outperforming the S&P 500. ADX combines a portfolio of blue-chip US stocks with an 11.4% discount and an 8.1% dividend yield, making it a compelling option for income and long-term growth.
Strategic Asset Allocation: Prioritizing US Markets with a CEF Edge
The current market environment suggests a continued focus on US-based stocks and CEFs, given their strong performance and attractive income potential. While international diversification can be achieved through carefully selected, deeply discounted, high-yielding CEFs, such investments should be considered tactical and shorter-term. ADX, with its robust performance, high dividend, and long-standing track record, stands as a prime example of the advantages offered by US-focused CEFs. This approach prioritizes established, profitable companies while leveraging the unique features of CEFs to enhance returns and generate consistent income.
Navigating the Investment Landscape: A Prudent Approach
The investment landscape requires a discerning approach, balancing the allure of international diversification with the consistent strength of the US market. While international CEFs can offer attractive short-term opportunities, their long-term potential remains constrained by the historical underperformance of international stocks. Therefore, a core focus on US-based investments, particularly through CEFs like ADX, offers a more compelling combination of income, growth, and stability. This strategy leverages the established strength of US companies, combined with the discount and income advantages of CEFs, to build a resilient and rewarding investment portfolio. Continuous monitoring and strategic adjustments are vital to navigate market fluctuations and optimize long-term returns.
