April 17, 2024

Inflation and Interest Rates Spoil the Party Again

After five consecutive up months for the market, April has been a bummer. Is this just an overdue end to the recent rally or something worse?

The S&P 500 is down 3.6% so far in April. But the more interest rate-sensitive sectors have faired far worse. Sure, the rally was long in the tooth anyway. But the narrative has also changed for the worse.

The problem is the same old nemesis, inflation and interest rates. Inflation just won’t go gently into that goodnight and has been ticking higher so far this year. March CPI was 3.5%, up from 3.1% a few months ago. While that seems minor compared to the double-digit inflation of decades ago, it’s worse than it seems because inflation is measured differently now. By the same measure, today’s inflation would be close to 8%. And this is after the steepest Fed rate hiking cycle in decades.

The market rallied on the expectation of falling rates and a soft landing. But now no landing and still-high rates seem more likely. While a strong economy has some benefits, the market wants those rate cuts. But the Fed is wobbling on that. And the benchmark 10-year Treasury yield has spiked from below 4% at the beginning of the year to a current 4.65%. Maybe the market will learn to live with continued high rates, or maybe the high rates will eventually tank the economy.

The news isn’t dire at this point though. As long as there isn’t more disturbing inflation and rates rising near the old highs or beyond, or the economy doesn’t fall into recession, the market should be okay over the rest of the year. The market is very capable of finding a way to be happy in the absence of the two extremes.

Meanwhile, there is a high danger of escalation in the Middle East. It’s just an overdue end to the recent rally for now. We’ll have to see if it becomes anything worse over the next several weeks.

Recent Activity

April 3
Marathon Petroleum Corporation (MPC) – Rating change “BUY” to “HOLD”

April 10
Intel Corporation (INTC) – Rating change “BUY” to “SELL”

April 17
UnitedHealth Group Inc. (UNH) – Rating change “HOLD” to “BUY”

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 6.4%) – This is a great company with a great business that has a long track record of outperforming the market. But it has floundered the past two years as interest rates rose to multi-decade highs. However, BIPC didn’t pull back with other interest rate-sensitive stocks earlier this year. It just kind of went sideways instead. But the situation has changed over the past week and BIPC has also plunged. The interest rate scenario got sufficiently ugly that BIP couldn’t withstand it. The longer-term prognosis is still positive as rates, although on the upswing recently, have likely already peaked. Brookfield has some of the most defensive revenues possible and continues to deliver strong operational results. (This security generates a K-1 form at tax time). BUY

Enterprise Product Partners (EPD – yield 7.2%) – Even this midstream energy juggernaut has shown some weakness over the past week, although not nearly as much as its peers. Energy stocks are still strong and in a good position as a hedge against increased tensions in the Middle East, as that will likely raise the price of oil and the energy sector. But this past week has been more about interest rates. Rising rates will hurt almost all stocks, but EPD has shown a lot more resilience than most. The company should deliver solid growth this year, and that massive distribution is extremely well supported. (This security generates a K-1 form at tax time). BUY

Main Street Capital Corporation (MAIN – yield 6.2%) – This BDC has shown good resilience over the past tumultuous week. With the portfolio of small businesses, it is helped as much by the strong economy as it is hurt by rising rates. MAIN is still reasonably priced at less than 1.6 times book value and with most other valuation measures below the five-year average. It also pays that safe and high dividend every single month with a strong possibility of supplemental dividends over the course of the year as well. MAIN should also provide strong total returns over time generated by its largely successful small business portfolio. BUY

ONEOK Inc. (OKE – yield 5.1%) – OKE is consolidating a little after rising sharply in February and March. But it is still in an uptrend that began about a year ago. Unlike most energy companies, OKE has eclipsed the pre-pandemic high. Meanwhile, the company is justifying the strong stock performance operationally. ONEOK reported a 42% increase in profits over last year’s quarter on higher LNG volumes and the contributions of the recent Magellan Midstream acquisition. The company also set ambitious guidance for this year. BUY

Realty Income (O – yield 6.0%) – This legendary income stock is still floundering. It just hasn’t perked up in the past couple of months like many of its peers have. It’s just moved sideways instead. It is looking like O will be stuck in the mud until interest rates really move lower, which may or may not happen later this year. But the monthly dividend has been raised every year since 1969. The last two years have been among the worst in this stock’s history, which makes it dirt cheap ahead of an environment that will get better eventually. BUY

The Williams Companies, Inc. (WMB – yield 5.0%) – Like EPD, this midstream energy company stock has been strong all year but a little weaker over the past week in sympathy with the overall market. WMB has broken out since the middle of February and the latest pause may be only a temporary setback as the energy sector is still strong. It’s a stable, high-yield stock, and the company should deliver solid and dependable earnings in just about any economy. Business remains solid and not dependent on commodity prices. It pays a well-supported dividend, and recent acquisitions and expansions ensure more solid growth going forward all the way out to 2028. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.8%) – This biopharmaceutical company stock had been riding high until April came along. It’s down 10% for the month so far. ABBV had broken out of the old range and made a new series of 52-week highs. It usually consolidates after a surge like that and the ugly market expedited things. But it’s still had a huge run since the end of November and is behaving quite well considering the Humira patent expiration. Management expects a return to moderate growth this year and robust growth next year. Investors are starting to price in the company turning the Humira corner on the way to a bright future. BUY

American Tower Corporation (AMT – yield 3.6%) – AMT is taking another hit from interest rate-related gyrations. It has been moving with the interest rate prognosis for two years now. But the stock had been acting badly even before the interest rate consensus turned ugly after the company cut the dividend by 4.7% to focus on debt reduction. It sounds worse than it is. It just lowered the dividend to the third-quarter level, which was the third quarterly increase for 2023. But the current dividend is still higher on a year-over-year basis. The reversal of the fourth-quarter hike is a head scratcher that shouldn’t affect the stock’s trajectory over the course of the year. BUY

Broadcom Inc. (AVGO – yield 1.6%) – The AI juggernaut has leveled off over the past couple of months but hasn’t really pulled back from the lofty levels. The superstar AI beneficiary had flirted briefly with a pullback after earnings failed to blow people away. But it has quickly reversed course. The turnaround came after Broadcom announced it secured a new, large customer for its AI chips. AI revenue quadrupled in the last quarter, and it is being speculated that the new customer is Amazon (AMZN) or Apple (AAPL). AVGO has consistently soared higher, then leveled off, then soared higher again. Until that pattern is broken, it will be held. HOLD

Digital Realty Trust, Inc. (DLR – yield 3.5%) – The data center REIT has moved well off the lofty high at the beginning of March. It’s still up slightly YTD, but the terrible REIT market is holding it back for now. DLR can get knocked around in the short term with the technology sector or the interest rate prognosis, but the outlook is still very good. The data centers will benefit from increasing AI spending, providing Digital with an additional growth catalyst that could last for years. Yet, DLR is still well below the all-time high made at the end of 2021 before the inflation bear market. BUY

Eli Lilly and Company (LLY – yield 0.7%) – LLY had fallen about 4.5% after the announcement that the FDA decision regarding approval of its high-potential Alzheimer’s drug Donanemab will be delayed but has since recovered. Lilly is also being targeted for drug price negotiation by the government, but the stock barely budged. LLY has leveled off for two months but has done that several times over the last few years, and then it had another price surge. Lilly again killed it on earnings and guided higher for 2024. The weight-loss drug is a monster and looks like a mega-blockbuster and the Alzheimer’s drug should get the nod in the next few months. HOLD

McKesson Corporation (MCK – yield 0.5%) – Even MCK has stumbled ever so slightly in the tough market for healthcare stocks. But it is still very much in an uptrend that began over a year ago. MCK just continues to forge quietly higher while no one seems to notice. Earnings were stellar with 15% revenue growth and 12% earnings growth and McKesson raised guidance for 2024. The company dominates a market that grows all by itself because of the aging population. MCK continues to roll forward. Even the recent weakness is quite minor compared to its peers. BUY

Marathon Petroleum Corporation (MPC – yield 1.6%) – This refining company stock has pulled back this month after a rather silly surge to new highs. MPC was reduced to a HOLD because it had gotten ahead of itself. But it’s still up over 39% YTD. The economy is solid, and profits are booming. It’s also true that the situation in the Middle East is at a high danger point of escalation. More trouble should lead to rising energy prices, which would be positive for the sector and likely MPC as well. It’s still a strong stock and a great hedge against current events. HOLD

Qualcomm Inc. (QCOM – yield 1.9%) – After a dazzling performance late last year and early this year, QCOM has been bouncing around sideways since early March. Qualcomm is secretly one of the best semiconductor and AI stocks to own. It had been held back by cyclicality, both in semiconductors and smartphones. But the negative cycle is ending, and AI is coming to mobile devices. QCOM cooled off after a huge rally. A breather would probably be a healthy thing for the stock. But the rest of the year looks strong as Qualcomm is also introducing new AI chips for PCs and smartphones and is well positioned for the next phase of the AI craze. BUY

Rating change – “HOLD” to “BUY”

UnitedHealth Group Inc. (UNH – yield 1.5%) – UnitedHealth reported earnings on Tuesday that provided some good news for a change. The company soundly beat expectations with an 8.6% revenue rise and a better than 10% increase in adjusted earnings from last year’s quarter. The company also issued strong guidance. It was a relief to the market after recent troubles, and the stock jumped over 7% in trading shortly after the report and lifted other stocks in the medical insurance industry as well.

UNH had been reeling after the cyber-attack caused a huge disturbance in the company and the industry. But UnitedHealth appears to have absorbed the costs while maintaining strong growth in the quarter and future quarters. With recent troubles behind it, the company has solid and defensive earnings and is well positioned going forward. BUY

Visa Inc. (V – yield 0.7%) – This payment processing global goliath has cooled off after about a five-month rally. V had been making a series of new highs all year but has pulled back 5% since late March. A consolidation had to happen eventually, and it’s still in an uptrend that began in the fall of 2022. The recent better-than-expected economic news bodes well for Visa. V was slow to recover from the pandemic because the global economy lagged. But now it’s making up for lost time. V will likely continue rising slowly unless and until the economy tanks. The company reported upbeat guidance through 2024. HOLD

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.3%) – This one-of-a-kind life science property REIT continues to be at the mercy of the latest interest rate thinking, along with most other conservative dividend stocks. Since the recent leg of interest rate consensus has been negative, ARE has taken a hit. But I’m generally positive going forward as interest rates have likely already peaked. ARE is a great income stock selling at the low end of historical valuations while the company is consistently growing revenues and profits from its niche properties. I’m still expecting a good year for ARE and a solid income. BUY

NextEra Energy (NEE – yield 3.3%) – While this past week has been ugly for most conservative dividend stocks, the performance of NEE has been quite encouraging. The stock pulled back just a little and is still at about the same price it was at the beginning of this month. NEE is still in a strong uptrend that began at the beginning of March. I guess it is so beaten down that downside volatility is limited. NEE had been a superstar performer before inflation and rising interest rates. It provides both safety from its best-in-class regulated utility business and growth from its considerable clean energy business. BUY

USB Depository Shares (USB-PS – yield 5.9%) – The sharp rise in interest rates is taking a toll on the price of this and other fixed-income securities. The benchmark 10-year Treasury yield has risen from below 4% at the beginning of this year to the current 4.66%. And it may rise higher. That said, I still believe it is unlikely that rates will eclipse the high of 5%. The preferred issue provides a great yield and diversification and it is likely that rates trend lower over the next year. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.9%) – Ditto for VCLT. It doesn’t like rising rates. But that’s okay unless rates rise to new levels beyond what has been seen in this cycle. I believe that is unlikely and VCLT is still well positioned. BUY

Xcel Energy (XEL – yield 4.1%) – The alternative energy utility has been slowly recovering from the price shock last month after it was reported that Xcel could be held liable for damages for the raging Texas wildfire. Xcel has admitted that its equipment was likely involved in igniting the blaze. This weird development is also ongoing, and the scope of the damage is still not known. NEE was downgraded to a HOLD until there is more clarity on the matter. The stock has certainly stabilized and it is encouraging that XEL barely budged last week when the environment had been so damaging for most of its peers. HOLD

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