April 3, 2024

A Hot Market Meets “Good News Is Bad News”

It was a great first quarter. The S&P closed out March up 10% YTD. The index also rallied an impressive 28% from late October through the first quarter. Is there more upside ahead?

Things have been good. The Fed reiterated its intention to lower the Fed Funds rate three times this year at the March meeting. Meanwhile, inflation is way down and the economy is solid. Manufacturing data was much better than expected and the Fed raised its GDP forecast for 2024 from 1.4% to 2.4%.

But the economic data may be a little too good for the market’s liking. Stocks had rallied so strongly on the notion of falling rates and a soft landing in 2024 that the strong economy is messing with the falling rates thing. The odds of a first Fed rate cut in June fell below 50% and the benchmark 10-year Treasury rate soared to a new 2024 high. The indexes have been falling this week.

The market should continue to have a good rest of the year provided rates fall and the economy stays out of recession. It needs to be in that space. If rates don’t fall or the economy falls into recession later this year, all bets are off. While the Goldilocks zone scenario is getting a second look by the market so far this week, it still has a good chance of occurring.

In any event, this rally may be getting a little long in the tooth. A consolidation or pullback at this juncture wouldn’t be abnormal or unhealthy. If the market does pull back, it will likely regain traction in the months ahead. A rising rate or recession scenario likely wouldn’t be revealed until later in the year.

The rally is still in place for now, but it is wobbling this week. In the meantime, energy stocks are quietly killing it. Energy is by far the number one performing market sector this week, and the second-best performing sector YTD as oil prices continue to creep ever higher. The three midstream energy companies in the portfolio are all at or near the 52-week highs. And refiner company stock Marathon Petroleum Corporation (MPC) has soared 35% year to date.

Recent Activity

March 6
Xcel Energy Inc. (XEL) – Rating change “BUY” to “HOLD”
UnitedHealth Group Inc. (UNH) – Rating change “BUY” to “HOLD”

March 13
Purchased Main Street Capital Corporation (MAIN) – $46.18

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

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 5.3%) – This historically stellar performer might be finally turning things around after a lousy couple of years. Apparently, the stock doesn’t like inflation and rising rates. Hopefully, those things are behind us. BIP is right around where it started this year despite a rougher start for many dividend-paying peers. Brookfield has some of the most defensive revenues possible. It’s also been expanding into cell towers, data centers and foundries. Meanwhile, Brookfield continues to deliver strong operational results and can well endure a slowing economy. (This security generates a K-1 form at tax time). BUY

Enterprise Product Partners (EPD – yield 6.8%) – The midstream energy partnership just hit a new 52-week high. Energy continues to thrive as oil prices keep creeping higher amid the strong economy. These are good times for midstream energy stocks. EPD is already up over 12% YTD. Looking forward, the company should deliver solid growth this year with anticipated steady hydrocarbons demand and recent acquisitions coming online. That massive distribution is extremely well supported, and the stock is still well below the all-time high despite much higher earnings. (This security generates a K-1 form at tax time). BUY

Main Street Capital Corporation (MAIN – yield 6.1%) – Although this newest portfolio addition is currently selling near the 52-week high, it is still reasonably priced at less than 1.6 times book value and most other valuation measures below the 5-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 5.0%) – Paying huge yields. Delivering on the stock price too. It’s been a glorious year so far for this midstream energy company. This one has been trending higher since last May. Unlike most energy companies, OKE has eclipsed the pre-pandemic high. The price is up over 47% since last May and 14% YTD. 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 5.8%) – This beleaguered but legendary monthly income stock has failed to rally over the past month, as many of its peers have. O can’t seem to escape the high interest rate negativity. While it can’t buck the trend, it should react quite well if interest rates trend lower over the course of this year, which is a scenario with a strong possibility. The historically strong performer is dirt cheap ahead of an environment that will likely at least stock getting worse in terms of interest rates. It’s probably the very late innings for rising and high interest rates and O is well positioned ahead of a likely shift in the future. BUY

The Williams Companies, Inc. (WMB – yield 5.0%) – It’s a new high for this midstream company stock too. After going sideways for many months, WMB has broken out since the middle of February. Energy stocks are hot and midstream companies are mostly selling near multi-year highs. 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 3.4%) – This star biopharmaceutical company stock has leveled off somewhat after a big surge over a three-month period. But it is holding strong and still within bad breath distance of the high. After a subpar year in 2023 when the company suffered steeply falling revenues because of the Humira patent expiration, ABBV is up 14% YTD and 32% since late November. ABBV has broken out of the old range to a new all-time high as 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 3.4%) – AMT had been rallying after a bad start to the year until recently. It has been turning south for a couple of weeks. The reason is that 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. It’s dumb to negate the fourth-quarter increase, but the current dividend is still higher on a year-over-year basis. The reversal of the fourth-quarter hike is a headscratcher that shouldn’t affect the stock’s trajectory over the course of the year and AMT is recovering already. It’s still one of the best REITs on the market that deals in very high-quality properties. BUY

Broadcom Inc. (AVGO – yield 1.6%) – It’s back in business. The superstar AI beneficiary had flirted briefly with a pullback last month after earnings failed to blow people away. But it has quickly reversed course and made up most of the dip. 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). HOLD

Digital Realty Trust, Inc. (DLR – yield 3.4%) – The data center REIT has been sort of bouncing around sideways since the end of January. 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. DLR is still well below the all-time high made at the end of 2021 before the inflation bear market. But earnings and prospects are much better now. BUY

Eli Lilly and Company (LLY – yield 0.7%) – Even this healthcare juggernaut flirted with a pullback but has since recovered. 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. A decision had been expected in the first quarter but will now likely be later in the year. But it’s just a delay, and the stock is back on track. Lilly again killed on earnings and guided higher for 2024. The same great story is still very much in place. HOLD

Intel Corporation (INTC – yield 1.2%) – The chipmaker has cleaned up some of its recent shortcomings. It has been delivering new chips on schedule and has more coming, including important AI products. It also has a new and rapidly growing chip manufacturing business that has secured $20 billion in backing from Washington as the country seeks to manufacture its own chips and reduce reliance on China. It’s still cheap and the future should be a whole lot better than the recent past. Recent stock performance reflects the fact that investors generally agree. There are good days ahead as the bounty from the new AI chips and the foundry business gain traction. BUY

McKesson Corporation (MCK – yield 0.5%) – There’s nothing new to say about this stock. And that’s the beauty of it. MCK just continues to forge quietly higher while no one seems to notice. It’s been making a series of new all-time highs for the last year and just hit another one last week. It’s already up over 13% YTD while investors focus elsewhere. 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. It’s been in an uptrend since the pandemic. BUY

Rating change – “BUY” to “HOLD”

Marathon Petroleum Corporation (MPC – yield 1.7%) – The good times just keep getting better for this refiner company stock. Energy is hot and MPC has a long track record of significantly outperforming the sector. It’s now up 45% since being added to the portfolio in November and 35% YTD. While no one is looking, energy is by far the top-performing S&P sector over the last month and the second-best-performing sector YTD. But the upside has more limit than an AI company or a drug company with new mega-blockbuster potential drugs. It has moved past the ideal buy range and is reduced to a HOLD. HOLD

Qualcomm Inc. (QCOM – yield 1.9%) – 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 over the past month after a huge rally in which it had risen 22% YTD and 65% since late October. It could bounce around for a while here. 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

UnitedHealth Group Inc. (UNH – yield 1.5%) – While the hacking issue is in the process of being resolved, another problem is reeling the stock on Tuesday. The Biden administration announced that Medicare Advantage rates will increase far below what insurance companies were demanding to keep pace with costs. The administration announced rates will increase by 3.7% in 2025. It will put a dent in earnings as companies struggle to make up the cost increases. But this is a risk of healthcare insurance. The government has enormous sway and can make decisions companies don’t like. It’s another hit to the stock whose longer-term trajectory should be solid. HOLD

Visa Inc. (V – yield 0.7%) – This payment processing global goliath is thriving. V has been making a series of new highs since early November. It’s still in an uptrend that began in the fall of 2022. V was slow to recover from the pandemic because the global economy lagged. But now it’s making up for lost time. It’s up 8% YTD and will likely continue rising slowly unless and until the economy tanks. Earnings beat estimates with upbeat guidance through 2024. HOLD

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.0%) – This one-of-a-kind life science property REIT is back in business. It was hot late last year. Then it pulled back in the early part of this year. But it has been moving back up since the middle of February and has made up just about all of the earlier year losses. The recent good interest rate news has reignited ARE. It is likely that interest rates have peaked and will trend lower throughout the year or at least just stay where they are. 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 expecting a good year for ARE and a solid income. BUY

NextEra Energy (NEE – yield 3.2%) – NEE has been moving higher this month. After moving with the ebb and flow of other defensive dividend stocks late last year and early this year, it has moved back to the high before this year’s earlier selloff. It 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. The utility reported strong earnings that exceeded expectations again last month and reiterated its growth projections for this year, near the top of the estimated range. The interest rate-related weakness should at least diminish going forward as rates have likely peaked. BUY

USB Depository Shares (USB-PS – yield 5.4%) – The party isn’t over for fixed income. Rates have still peaked and may trend lower for the year. The price has soared from the low of late October and has provided a 21% total return since being added to the portfolio in October of 2022. After the worst two years ever for fixed income, this preferred issue is well positioned for a further rebound. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.9%) – Ditto for VCLT, as evidenced by the 13% price appreciation since last October. This long-term bond fund is very sensitive to interest rates. It held up relatively well in the rising rate environment and now rates may continue to trend lower. If the economic strength lasts, VCLT should remain stable and deliver a strong income. If the economy weakens, and/or rates move lower, there should be more upside for the price. BUY

Xcel Energy (XEL – yield 4.1%) – The alternative energy utility had a terrible time last month. The stock crashed 14% after it was reported that Xcel could be held liable for damages for the raging Texas wildfire, which is the worst in the state’s history and encompasses a land mass larger than the state of Rhode Island. Several utilities have been held liable for wildfires in recent years. 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 not known. NEE was downgraded to a HOLD until there is more clarity on the matter. The stock has bounced higher since the initial decline and has held steady. HOLD

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