I never thought that the yen carry trade would one day be a big part of the financial news. But now it is.

We talked about this strange set of circumstances and how it triggered the August 5 stock market crash in our article on Monday. Today we’ll look at what this all means for closed-end funds (CEFs), including the opportunities we now have in these high-yield funds.

First of all, while the press was quick to portray the correction as a “Made in Japan” event, Do In America, the first signs of a slowdown are visible.

The table above is a reference to the Sahm Rule, another once obscure topic (see the topic here?) that is now in the mainstream. Readers of my CEF Insider The service will recognize this, as we talked about last year that it was an indicator of an impending recession.

In short, when the blue line rises above 0.5, as it is now (see right in the chart above), the probability of a recession in the next year or so increases. That’s because the rule is based on unemployment trends: a higher number indicates rising unemployment, a vicious cycle that usually ends in a recession.

Or at least that’s how it has been in the past. That’s why these peaks and the grey areas in the chart (which measure US recessions) are so closely correlated. So, are we heading for a recession since the indicator is now above 0.5?

Torsten Sløk, chief economist at Apollo Global Management (one of the world’s largest managers of venture capital and private equity funds), disagrees. For the following reasons:

His reasoning boils down to a backlog in the processing of work visas. Sløk writes: “Perhaps the reason for the increase in the unemployment rate is that the government is gradually clearing a COVID-related backlog of visa applications, which increases the supply of labor.”

This would mean that there are more people available for work due to these pending work visa applications, while the number of people in employment does not change until the visa application process is completed and the person either gets a job or their application is rejected. In either case, the temporary change in the unemployment rate disappears.

Let’s face it: This is all a bit confusing. Could this really be what’s going on here? One thing we can say for sure: Whatever happens in the labor market is not hurting U.S. corporate revenues.

As you can see, S&P 500 revenue growth has been increasing since the second quarter of 2023, and this trend is accelerating.

Our current approach to equities – and CEFs –

In short, my bullish view on stocks has not changed. But recent volatility has made it more difficult to find the right time to buy stocks.

Certainly, stock prices are still up nicely year-over-year: 12% for the S&P 500 and 10% for the NASDAQ. What’s strange, however, is that when we look more closely at the last few weeks, we see something strange.

The NASDAQ (whose benchmark ETF is highlighted in orange above) fell more than 10%, and the volatility we saw during this period was the highest since the pandemic, and even greater than during the 2008/2009 financial crisis.

Because this chart only tracks the opening and closing prices, it’s difficult to see exactly how dramatic this was. Let’s put it this way: At the bottom of the sell-off, stocks had given up all of their gains since January 19. A decline of this nature is highly unusual.

This was so unusual that the market naturally initiated a course change and, at the time of writing, share prices were already back to mid-May levels.

This 5.8% payer is experiencing a discrepancy that we can exploit

Of course, stock picking is challenging in such a volatile time, which is why we prefer to buy strategically cheap CEFs during sell-offs like these.

I’ve written a lot over the past few years about how unusually cheap CEFs are, and that’s still true today.

The Gabelli Dividend & Income Fund (GDV), For example, it has a 14.2% discount to net asset value (NAV, or the value of its stock holdings) and a 5.8% dividend yield. It also holds a solid mix of large and small value stocks. Mastercard (MA), American Express (AXP) And Eli Lilly & Co. (LLY) are top stocks.

This discount is particularly interesting now that the market price of GDV is iShares S&P 500 Value ETF (IVE)—a good gauge for the fund—on a total return basis over the long term. However, over the past two years, a lack of investor enthusiasm has caused GDV to fall behind.

This is an entry point for savvy, out-of-the-box thinkers, and what’s happening here isn’t unique to GDV. Higher volatility is making many equity CEFs cheaper on a market price basis, even as their underlying assets continue to grow. If this volatility continues, CEF investors who reinvest their high dividends will continue to get some excellent entry points in the future.

Michael Foster is a senior research analyst for Contrary outlook. Find more great income ideas here in our latest report “Indestructible income: 5 bargain funds with stable 10% dividends.”

Disclosure: none