I know, I know. This levitating stock market feels like a bubble that will burst any day.
So I get it if you’re nervous. And that’s actually a good thing. It pays to be wary when everyone else is throwing money at any asset—stocks included.
My take? Well, it might surprise you, but it’s this: We’re not in a bubble—AI-driven or otherwise.
But I get the fear—which is why we’re going to look at a two-step move that addresses it. This “best of both worlds” play gives us yields up to 8.2% and a hedge if, say, bullish analysts (like me!) end up wrong and the so-called “AI bubble” pops.
Like I said, I think that’s unlikely. But in any market, it always pays to spread out our risks, which is why I think this two-step move makes a lot of sense now.
Big Gains, Bad Vibes
You don’t have to look far to see what’s driving bubble worries. Over the last six months, stocks have soared 32.4%, or 65% annualized. There’s no way that can continue.
Right?
This perspective keeps people out of stocks, but we need to zoom out. Over the long haul, stocks have done well (but not too well) no matter when you bought them.
A Strong—but Not Bubbly—Showing for Stocks
Over the last decade, stocks have risen 12.9% on average per year. That’s above the century-long average of 10.5%, but not far above. And a higher gain now than in, say, the 1930s, makes sense. After all, our technology is better, and our companies are more efficient. So why shouldn’t stocks rise a bit faster than they used to?
So, at the very least, we can say that the last decade has been very good for stocks, but not bubbly. To see what a real bubble looks like, let’s flip back 30 years or so.
This Is a True Bubble
From 1996 to 2000, stocks returned 24.3% annualized. But most important, that was after several years of strong performance. Meantime, our recent strong market comes after two big selloffs: first due to the pandemic in 2020, and second due to misplaced recession fears in 2022.
So a bit of short-term outperformance to offset short-term underperformance makes sense. And that’s before we talk about AI.
About Those AI Gains
I had a chat with an old friend who’s now the head of the English department at a small liberal-arts school. He was telling me that he doesn’t know how to plan the curriculum for the upcoming school year because, as he put it, “All anyone wants to talk about is artificial intelligence.”
If even liberal-arts schools are obsessed over AI, should we worry that we’re in a bubble? If you look at Google Trends for the phrase “AI bubble,” you can see that, well, there is a bubble of worry about AI.
Source: Google Trends
No wonder the AI-bubble case is capturing the thinking of banks, private equity investors and journalists.
But let’s stress test this assumption. Our first stop? The CNN Fear and Greed Index.
Source: CNN.com
A lack of greed has led to a “neutral” reading, or a market where the fears of bubble prognosticators and the hopes of pollyanna-ish speculators cancel each other out. This is a realistic indicator that, no, we’re not in a bubble—at least not at the inflationary peak of the bubble cycle.
A lot of data is telling us that the economy is strong and inflation is high—and that’s not me talking, it’s Apollo Investment’s chief economist, who makes this argument clearly with a slew of charts. Let me just share what I think is the most important point.
If Americans’ fear about their jobs is declining and well off earlier peaks (see the far right side of the above chart), we’re far from a situation where this harms the economy. I’m not saying that will never happen—just that it isn’t coming soon.
Moreover, a recent study has shown AI isn’t taking jobs.
“The labor market doesn’t feel great, so it feels correct that AI is taking people’s jobs,” says Martha Gimbel, one of the Yale academics who authored the study. “But we’ve looked at this many, many different ways, and we really cannot find any sign that this is happening.”
So, what is happening? In short, AI is boosting corporate profits.
S&P Earnings: Back to Growth, Thanks to AI
Over the long-term, we’ve seen earnings growth on a steady upward track, with the pandemic breaking that trend. But setting that aside, we’re back on that trend.
In part, that’s thanks to things getting back to normal (hence the big jump in late 2021 and early 2022), but it’s also partly due to the 10% earnings rise in the past year, far above the 6.7% annual earnings growth of the S&P 500 over the last 50 years.
In other words, stocks are rising more now because profits are doing the same, and technology will likely cause that trend to continue.
This Fund Lets Us Tap AI-Driven Gains …
Nonetheless, if you’re still concerned we’re in a bubble, I have a solution: a closed-end fund (CEF) that sells covered-call options.
Under these deals, the fund sells investors the right to buy its stocks when they hit a certain price at a fixed future date. No matter what happens, the fund keeps the fee it charges for this and uses it to fund its dividend.
It’s a strategy that does best in volatile markets. So if you hold a fund that invests in the S&P 500 broadly, you have a nice setup for gains in an up market and a bit of a hedge in a down one—say if we do see some short-term correction around AI.
That leads us to the Nuveen S&P 500 Dynamic Overwrite Fund (SPXX), which yields 7.7%—handing us a nice “cash cushion” in the form of that high dividend. It also owns the S&P 500, so you’re getting a nice mix of large cap AI players, like Microsoft (MSFT) and Alphabet (GOOGL), and those that benefit from AI, like Visa (V).
… But I Still Prefer This 8.2% Payer
The problem with the covered-call strategy is that it can cap our upside in the long run, as the fund’s best stocks are sold, or “called away.”
That’s why I prefer the 8.2%-yielding Liberty All-Star Growth Fund (ASG), a “pure” equity CEF that’s a holding in my CEF Insider service. This one not only has a strong long-term track record (it’s up over 200% in the last decade, including dividends) but has both increased regular payouts and paid out some huge special dividends, too.
Big Income and Big Special Payouts, Too
Sure, that dividend does float a bit, but that’s because it’s tied to the fund’s underlying performance. It’s actually a good setup as it gives management latitude to reinvest its profits without worrying about being tied to a fixed payout.
That, in turn, drives further upside for us.
Moreover, as I write this, ASG trades at an 8.2% discount to NAV, which is much more generous than its historical average of 2.2%. That puts additional upside (beyond the stock market’s future gains) on the table as that discount returns to normal.
It’s a sweet setup that lets us ride further AI gains and grab big dividends, too—something those who limit themselves to mainstream AI stocks simply can’t get.
4 More Cheap CEFs Yielding 9.5% (and Ready for Anything)
These 2 CEFs—especially when bought together—are a great way to hedge your portfolio, and give yourself a nice shot at short- (and long-) term upside, no matter what comes next for the market.
They’re just the start. Because I’ve uncovered 4 more CEFs with big, unusual discounts and even bigger yields—I’m talking 9.5% on average here. And thanks to those big discounts, we get some nice downside protection (because it’s tough for an already-cheap fund to get cheaper) and a shot at outperformance as markets rise.
Click here and I’ll tell you more about these 4 funds—and you’ll also get to download a free Special Report revealing their names and tickers, along with my full research, so you can start collecting your first dividend check within weeks.