December 7, 2022

Good News Is Bad News

The market has started to stink up the place again because of better-than-expected economic news. I kid you not.

Strong jobs growth and continuing strength in pockets of the economy are spoiling recent investor optimism. Economic strength is not what the Fed wants to see in its battle against inflation. Strength in the economy indicates that perhaps the Fed will have to remain aggressive for longer to slow down the economy and snuff out inflation.

Good news is bad news. It indicates that the Fed has not gone far enough and will have to ultimately raise the Fed Funds rate above the currently anticipated 5% next year. It may also have to leave rates higher for longer. That scenario pushes out the timeline of a true market turnaround that leads out of the bear market and into the next recovery and bull market.

But much of this might be just short-term noise. Higher rates take a while to work through the economy. This steep rate hiking cycle may have already done a lot more damage than recent numbers indicate. The economy should deteriorate plenty fast in the months ahead. Then, after market angst over falling corporate profits, stocks should find a bottom.

This is the sort of muck we’ll have to get through before the market recovers sometime next year. Our defensive positions in utilities, healthcare, and midstream energy should be ideal to endure what is likely ahead in the next several months. The portfolio is well positioned with defensive stocks and a few cyclical stocks that should provide upside leverage if the market turns around sooner than expected.

High Yield Tier

Enterprise Product Partners (EPD – yield 7.8%) – On the surface, EPD doesn’t appear to be doing anything. It’s around the middle of the 52-week trading range and the same price it was back in March. But EPD has returned about 20% YTD in an abysmal year. This stock is designed to bore you to tears while providing a high income and positive traction in a bear market. The market is likely in for more trouble ahead and more outperformance from EPD. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.9%) – This midstream energy stock has pulled back along with just about everything else over the last few days. But don’t let that fool you. It is still trending sharply higher since late September. The stock got creamed in the late summer selloff as interest rates spiked. But the situation is changing and many of these defensive dividend stocks have been roaring back. The uptrend is still intact for WMB and it may march to new highs unless the market turns ugly, in which case it should still hold its own. BUY

Realty Income (O – yield 4.8%) – After an impressive rally from the October low, O has given some of it back over the last couple of weeks. That’s OK. It’s normal. O tends to spike higher and then pull back and consolidate. There isn’t any negative company-specific news behind the recent weakness and O still has the right stuff for this market. It’s recession-resistant and a great source of income. It will still likely continue to trend higher, but perhaps in a choppier fashion than we’ve seen recently. BUY

The Williams Companies, Inc. (WMB – yield 5.1%) – This midstream energy company stock is a similar recent story to OKE. It has moved up strongly since late September. However, WMB tends to be more resilient in choppy markets. It moved lower early this week, but not by much. The stock is still very much in an uptrend ahead of a period of strong relative performance. The company posted strong earnings because of resilient natural gas demand, something that is likely to endure through the recession based on shortages overseas. BUY

Medical Properties Trust, Inc. (MPW – yield 9.3%) – I am becoming increasingly confident that this hospital property REIT has already hit bottom and is likely to continue trending higher from here. The share price had become absurdly low. Investors realized undervaluation, which happens in markets like this, after the company delivered terrific earnings for the quarter with profits up 30% over last year. That was pretty good for a stock that was trading down 50% YTD. Results strongly indicate that the stratospheric dividend should be safe. The upswing is getting muddled in the recent selloff. But I think MPW has shown its true colors of late. HOLD

Dividend Growth Tier

AbbVie (ABBV – yield 3.6%) – This magnificent healthcare juggernaut is doing what it is designed to do: put you to sleep while making you rich. Even as the world and the market spiral toward Hades, ABBV has quietly returned 26% YTD and has soared all the way to the highest level since April. The stock appears poised to make a new 52-week high regardless of what the market does. The market loves the defensive business as a recession looms. Plus, AbbVie has 11 other drugs besides Humira that are on track to top $1 billion in net revenue this year. It’s a great company meeting a friendly market environment for the sector. HOLD

Broadcom Inc. (AVGO – yield 3.1%) – This technology stalwart trended sharply higher in November. The oversold semiconductor sector has been hot, and Broadcom is an exceptional company in the industry. Earnings are always reported late and will be posted tomorrow. The company is expected to report earnings per share growth of 31.5% for the quarter. And it usually beats expectations. AVGO is still a million miles from the 52-week high and can move back up fast when the technology environment improves. And it will. HOLD

Brookfield Infrastructure Partners (BIP – yield 4.1%) – I’m disappointed. This infrastructure partnership had been trending sharply higher since the second week of October but has pulled back so far this month. It’s likely because of turbulence in China and/or a stronger dollar. But it should be a temporary blip as the company’s crucial assets will continue to deliver steady earnings through a recession, it has inflation adjustments built into its contracts, the dividend is solid, and the stock is cheap now. (This security generates a K-1 form at tax time). BUY

Eli Lilly and Company (LLY – yield 1.1%) – It’s been a horrible market this year. But nobody told LLY. For most stocks, it’s like Gettysburg out there. But LLY has returned 35% YTD and just made yet another new all-time high. The stock may be poised to break out to new levels. Not only is Lilly expected to deliver annual earnings growth of 19% over the next five years, but it also has two incredible drugs in the pipeline that are potential future mega-blockbusters. HOLD

Intel Corporation (INTC – yield 5.1%) – Speaking of Gettysburg, let’s talk about INTC. It has been ugly for INTC. But the environment has been improving for technology. It has been the best performing S&P 500 sector over the last month as inflation looks to have peaked and longer-term interest rates have moved lower. The situation will surely improve for technology. Hopefully, the big turnaround isn’t that far off. Intel’s individual prospects should significantly improve as growth investments come to fruition. It’s been a painful slog. But it could prove to be worth the pain over time. BUY

Qualcomm Inc. (QCOM – yield 2.5%) – As I mentioned above with Intel, technology stocks have posted seriously improved relative performance recently as inflation and interest rates have come down. Even if the worst still isn’t over for the sector, QCOM has shown you how fast it can move higher when the tech sector environment improves, and it surely will. Remember, the market anticipates. Qualcomm just announced a profit slowdown for the quarters ahead. But the market has been pricing that in all year, even when current profits were still booming. Before long, the market may start sniffing out a recovery. HOLD

Visa Inc. (V – yield 0.9%) – V made a nice move off the low as the market improved and the company once again killed it on earnings. The payments processing giant continues to benefit from the end of Covid restrictions despite the slower economy. But the earnings growth should slow next year as earnings comparisons get tougher. V is a cyclical stock that is dependent on the market and economy. But at the end of the day, this business is such a license to print money it should be illegal. When the market ugliness eventually abates, V will blow us away. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 2.0%) – This combination utility and clean energy powerhouse has been trending sharply higher since the recent low in October. Even if the overall market hits a new bottom again, I believe NEE has already seen the bottom and will continue to recover. The interest rate spike that sent utility stocks reeling is reversing as we head towards recession. NEE has already regained most of what it lost in the fall selloff. And it’s probably not done yet. BUY

Xcel Energy (XEL – yield 2.8%) – This clean energy utility was oversold in the September market plunge and has had a recovery very similar to NEE. It was upgraded to BUY because it was timely after a huge selloff that is proving to have been unjustified. The near term is shaping up well and the longer-term prognosis is also excellent. It should also benefit from new legislation from Washington that will reduce costs on its considerable clean energy production. The stock should be solid in a recession. BUY

USB Depository Shares (USB-PS – yield 5.7%) – This high-paying investment grade preferred stock is certainly working so far. It was added to the portfolio after interest rates spiked to a 15-year high. Rates have since been plunging as inflation cools and we barrel toward recession. Hopefully you got the stock last month when the yield was over 6% but you can still buy it now if you didn’t. BUY

Invesco Preferred ETF (PGX – yield 6.2%) – Ditto what I said about USB-PS. Longer-term rates have fallen significantly since this preferred stock ETF was added to the portfolio early last month. Although interest rates may have peaked for the foreseeable future, it’s still a good time to lock in this high yield as a recession is likely to pressure rates lower. BUY

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