The Market Sobers Up
The impressive early year rally has ended. The S&P ended its third straight down week on Friday and is sharply lower to start this week.
The “soft landing” optimism of January has given way to concern about a hawkish Fed and rising long-term rates. Inflation had been coming down, and the Fed appeared to be chilling out while the economy remained on solid footing. But a continued strong economy, a rise in January inflation, and a more belligerent Fed are spoiling the party.
GDP, the consumer, and other economic numbers have remained strong. But that means inflation is likely to be stickier and the Fed will have to stay aggressive. It pushes a more dovish Fed further into the future and prolongs the inflation/Fed conundrum that caused the bear market last year.
A recession is highly unlikely in the first half of this year, as many had previously thought. GDP grew at 2.6% in the fourth quarter and the Atlanta Fed is now forecasting 2.4% growth in the first quarter. The resilient economy raises the possibility of a soft landing, where we get through this inflation and Fed rate hiking cycle without too much economic pain. But a recession may just be a little further down the road. That’s good for now, but bad for later.
The Fed may have to induce more economic pain to subdue inflation. While anything is possible, history does not bode well for a soft landing. Since 1961, the Fed has embarked on nine inflation-fighting rate hiking cycles. Eight of the nine resulted in a recession.
The strong economy may just prolong the agony. The market anticipates six to nine months ahead. It was hoped that not far into this year it would sniff out the economic bottom and the next recovery. But with a recession unlikely until late this year or early next year, it could be more of the same 2022 mode for a while.
The rotation into cyclical stocks and away from more defensive stocks in the beginning of the year is unlikely to last. There is a strong chance that the relative performance of defensive dividend stocks will again prevail.
Medical Properties Trust (MPW) – Rating change “HOLD” to “BUY”
Xcel Energy (XEL) – Rating change “BUY” to “HOLD”
Fixed Income 20%
High Yield Tier
Enterprise Product Partners (EPD – yield 7.4%) – This is a great defensive stock with a safe and high dividend heading into a time when such things should be at a premium. The partnership grew earnings 13% last quarter at a time when the average company has been reporting about a 5% decline. Distributable cash flow grew 17% in the quarter for a 1.9 times distribution coverage, one of the highest in the industry. Enterprise also raised the next distribution, marking the 24th straight year of distribution increases. (This security generates a K-1 form at tax time). BUY
ONEOK Inc. (OKE – yield 5.7%) – This midstream energy company has been moving sideways to down for over a month now. But the uptrend from the October low is still there. It’s tough to figure out this market in the near term. But ONEOK certainly has the right stuff for the way this market is likely headed. It pays a high and safe dividend and has a business where revenues should continue to thrive even with recession and inflation. BUY
Realty Income (O – yield 4.6%) – The legendary income REIT has been trending slowly higher since the middle of October. Interest rates appear to have peaked and the REIT sector is having a much better year so far. O has delivered a positive return over the last year while the overall market is down. O also finally eclipsed the elusive 65 per share level. Realty also reports earnings today (Tuesday). Hopefully the report will give the stock a boost and continue the breakout. BUY
The Williams Companies, Inc. (WMB – yield 5.7%) – This midstream energy company also has a business that should outperform in a recession as demand for natural gas should remain solid. But this company also had good news last week. Williams signed agreements with Chevron to support key development projects to transport gas from production sites to refineries and export facility in the Gulf of Mexico. The deal will provide Williams incremental cash flow for a minimum investment, further securing the dividend and boosting future revenue. BUY
Medical Properties Trust, Inc. (MPW – yield 8.9%) – The hospital REIT had some very good news last week. The stock lost more than half its value last year because of rising interest rates and concerns about some of its tenants’ ability to pay rent. Its top tenant had been on particularly shaky ground. But that tenant announced the sale of some of its properties in Utah. The sale gives it a cash infusion to pay money owed to MPT and the REIT can now get a healthier tenant for the sold properties. These events put the dividend on much more solid ground and the stock soared more than 8% on the day of the news. BUY
Dividend Growth Tier
AbbVie (ABBV – yield 3.9%) – ABBV has been moving higher of late after falling in the earlier part of this young year. The choppier market has caused somewhat of a rotation back into defensive plays like healthcare. The near-term fortunes of ABBV will largely depend on whether the recent rally continues or there is a rotation back into more defensive stocks. Longer term, this stock is a winner. AbbVie has a phenomenal pipeline that can replace the lost Humira revenues in a relatively short time. HOLD
Broadcom Inc. (AVGO – yield 3.1%) – Sure, the technology stocks have performed much better lately. But this software and chip company goliath has been trending sharply higher since October. It’s made a very big move and is up nearly 40% from the low. Its fortunes are tied to the technology sector, but it has done a lot better than its peers in the tough market. That could be because Broadcom’s business is more resilient than most as it reported a 34% earnings increase in the last quarter. HOLD
Brookfield Infrastructure Partners (BIP – yield 4.4%) – The infrastructure juggernaut reported 12% funds from operations (FFOs) per share growth in 2022 and 10.9% in the fourth quarter versus last year’s comparable periods. The company is benefiting as recent acquisitions come online. The stock has been weaker so far this year because of rising interest rates as Brookfield has a relatively high level of debt. But those rates have come down and earnings will remain resilient. (This security generates a K-1 form at tax time). BUY
Eli Lilly and Company (LLY – yield 1.4%) – – LLY has been moving lower and is down about 10% YTD after a stellar 2022 where it returned 34% in a bear market. Healthcare stocks have lagged. Earnings disappointed. And Lilly failed to get fast-track approval for its Alzheimer’s drug. Those are some negatives and the types of things big pharma runs in to once in a while. But beyond the near term this company is expected to grow earnings by 19% on average over the next five years and it has two potential mega-blockbuster drugs that could be approved in the next year. HOLD
Intel Corporation (INTC – yield 5.3%) – In a terrible time for Intel, there is a glimmer of hope in the latest bad news. The fourth-quarter earnings were terrible, and the company indicated results will be lousy again next quarter as PC demand continues to plunge in a sluggish global economy. But the stock didn’t really falter after that news. That suggests that the market already priced in a rotten first half. INTC looks to have already bottomed out. Meanwhile, the company is employing a massive cost-cutting program and new products should also help the bottom line in the second half of this year and beyond. HOLD
Qualcomm Inc. (QCOM – yield 2.3%) – It’s been a rough market for QCOM. The stock is down over 21% for the last one-year period. But the longer-term prognosis remains bright and the stock is also showing signs of having perhaps bottomed out. Qualcomm reported lousy earnings for the last quarter, and it appears that the next quarter won’t be much better. Yet the stock remained quite resilient after the report. That suggests this news was already factored into the stock price, and the market is looking towards improvement in the second half of the year. QCOM is up over 16% YTD and recently cracked the 130 per share level for the first time since September. HOLD
Visa Inc. (V – yield 0.8%) – The payments processing company stock has been thriving. After an impressive -3.4% return in last year’s bear market, V delivered strong returns in the earlier part of the year but has moved lower lately. Even if the recent cyclical rally ends, V should continue to hold up relatively well and showed a preview of how well it will react when the market finally turns for good. It’s well worth holding through the uncertainty into the next recovery. HOLD
Safe Income Tier
NextEra Energy (NEE – yield 2.5%) – This combination regulated and clean energy utility had been hanging tough in the January rally as other defensive stocks lagged. But the resilient behavior ended suddenly and NEE fell 12% in the last month. Earnings were stellar and there doesn’t appear to be a company-specific reason for the recent selling. It appears that the market just made up for lost time quickly. Now, the stock has stabilized and moved higher. This stock is a great longer-term hold and the recent selloff should be a good opportunity to buy it if you don’t own it already. BUY
Xcel Energy (XEL – yield 2.9%) – This clean energy utility stock fell in the earlier part of the year but has held steady since. XEL is still very well positioned ahead of a slower economy and it appears to be forming a base at the current level. I don’t believe defensive stocks are through yet and stocks like XEL are now cheaper. It’s also true that this clean energy utility is also capable of performing very well in a market recovery. HOLD
USB Depository Shares (USB-PS – yield 5.5%) – This preferred stock was added to the portfolio when interest rates were near the high, so it has returned more than 10% since. But interest rates have been moving back higher and economic strength and a hawkish Fed weigh on the fixed income market. But rates are still high relative to where they are likely to be longer term. BUY
Invesco Preferred ETF (PGX – yield 5.6%) – Ditto what I said about USB-PS. Longer-term rates have moved back up to the highest level since November. It’s still unclear if they will continue to move higher or if this is just a temporary bounce. But it is still a good time to buy this preferred ETF and the stable income provides a cushion in tough markets and rates may come down again. BUY
Vanguard Long-Term Corp. Bd. Index Fd. (VCLT – yield 4.1%) – There could be some near-term turbulence with the price on the way to solid longer-term returns and diversification. An imminent recession is out the window and there may be a period of rising rates again before the economy stalls out later in the year. BUY
High Yield Tier
|Security (Symbol)||Date Added||Price Added||Div Freq.||Indicated Annual Dividend||Yield On Cost||Price on|
|Total Return||Current Yield||CDI Opinion||Pos. Size|
|Enterprise Product Partners (EPD)||8.30%||26||27%||7.40%||BUY|
|Medical Properties Trust, Inc. (MPW)||13||-2%||8.90%||BUY|
|ONEOK Inc. (OKE)||6.00%||67||43%||5.70%||BUY|
|Realty Income (O)||66||19%||4.60%||BUY|
|The Williams Companies, Inc. (WMB)||8/10/22||33||Qtr.||1.7||5.30%||31||-3%||5.70%||BUY||1|
|Current High Yield Tier Totals:||6.40%||16.80%||6.50%|
Dividend Growth Tier
|Broadcom Inc. (AVGO)||596||40%||3.10%||HOLD|
|Brookfield Infrastucture Ptrs (BIP)||35||65%||4.40%||BUY|
|Eli Lily and Company (LLY)||328||124%||1.40%||HOLD|
|Intel Corporation (INTC)||28||-39%||5.30%||HOLD|
|Visa Inc. (V)||12/8/21||209||Qtr.||1.5||0.70%||224||8%||0.80%||HOLD||1|
|Current Dividend Growth Tier Totals:||2.50%||40.30%||3.00%|
Safe Income Tier
|U.S. Bancorp Depository Shares (USB-PS)||10/12/22||19||Qtr.||1.13||6.10%||20||11%||5.50%||BUY||1|
|Xcel Energy (XEL)||10/1/14||31||Qtr.||1.95||2.80%||68||187%||2.90%||HOLD||2/3|