A Soft Landing but No Rate Cuts Soon
The market seems to be trying to find itself and looking for a reason to rally. Earnings have been pretty good so far. But not enough to drive the overall market higher, at least not yet.
The S&P is up 3.6% YTD and it’s only February 7th. There’s nothing wrong with that. But the pace of ascent has slowed greatly from the last two months of last year. Plus, upside participation isn’t very broad. It’s mostly just technology. Most of the other stock sectors are negative for the year.
It’s also a bit of a tug-o-war between the good economic news and the decreasing odds of a Fed rate cut anytime soon.
On the one hand, the news is great. GDP and employment numbers were much stronger than expected. Inflation is way down. The Fed is still unlikely to raise the Fed Funds rate again. The economy is surging despite the highest interest rates in decades. So far, it sure looks like a “soft landing,” and the new bull market is young.
But Wall Street people are obsessed with rate cuts. They love those rate cuts boy. They plan vacations around them. But the strong economic news is causing the Fed to push back against the notion of cutting rates anytime soon. They’re still scared of the inflation they helped cause. And who needs rate cuts when the economy and market are doing just fine without them?
The expectation of a rate cut in March is done. Now there’s worry that a rate cut won’t come until the summer or later, or God forbid next year. The Wall Street disappointment is holding stocks back. The more interest rate-sensitive defensive dividend stocks are wallowing again as a result. The current mood favors cyclical and growth stocks.
But I’m not sure about the staying power of this good economic news. It could be a totally different situation later in the year. It may be one of those years when the narrative changes often. Let’s not give up on the defensive stocks. It’s also a good idea to stay diversified.
It’s also the peak of the earnings season for this portfolio. Several companies including AbbVie Inc. (ABBV), Alexandria Real Estate Equities (ARE), Eli Lilly (LLY), Marathon Petroleum Corporation (MPC), Brookfield Infrastructure Partners (BIP), Enterprise Product Partners (EPD), and Qualcomm Inc. (QCOM) reported earning this past week.
Recent Activity
January 10th
Purchased American Tower Corporation (AMT) - $208.97
January 17th
AbbVie Inc. (ABBV) – Rating change “BUY” to “HOLD”
February 7th
Visa Inc. (V) – Rating change “BUY” to “HOLD”
Current Allocation | |
| Stocks | 62.5% |
| Fixed Income | 19.5% |
| Cash | 17% |
High Yield Tier
Brookfield Infrastructure Partners (BIP – yield 5.2%) Earnings – The reliable revenues generated from the partnership’s crucial infrastructure assets produced funds from operations (FFOs) per share growth of 8.9% for the year 2023. The earnings report also highlighted the capital reallocation program successfully shifting into higher margin assets like data centers and cell towers. Returns are in line with what the company expected and the distribution was raised by 6% as planned. The last two years were crummy for defensive income stocks, but this year should be a lot better and BIP is one of the best. (This security generates a K1 form at tax time). BUY
Enterprise Product Partners (EPD – yield 7.6%) Earnings – This midstream energy partnership reported earnings last week that beat expectations with 5.6% adjusted FFO growth in a tough year for energy. Earnings were strongly supported by 16% annual growth in the natural gas liquids (NGLs) business. The company should deliver solid growth this year with anticipated steady hydrocarbon demand and $3.5 billion in growth acquisition this year coming online. EPD has produced solid and steady returns in different market environments with a 17.45% return in 2023 after a strong bear market return of 15% for 2022. It should deliver another solid year in 2024. (This security generates a K1 form at tax time). BUY
ONEOK Inc. (OKE – yield 5.8%) – This more volatile midstream energy company stock will bounce around more than its peers. It was up more in the last two months of 2023, and it’s down more so far this year. It is still in an uptrend that began last June. OKE is still priced below the pre-pandemic high despite having higher earnings now. The stock should be on stronger footing in the improved market environment. ONEOK raised the guidance on projected consolidated earnings going forward. It should deliver solid results in just about any kind of economy. BUY
Realty Income (O – yield 5.8%) – This is a legendary monthly income stock that has historically been a fantastic holding for income investors. It had a lousy two years as interest rates rose. But it soared at the end of last year after interest rates peaked. And O has had a crummy start to this year as the interest rate trade has reversed, for now. It is still a great stock at a cheap price. Receding inflation and likely peak interest rates remove the main downside catalyst that has been in place for the past two years. Market sector performance always rotates, but Realty’s reliable revenues keep coming. BUY
The Williams Companies, Inc. (WMB – yield 5.5%) – Returns have been solid and just what you hope for in a high-dividend stock in a challenging market environment for such stocks. The natural gas pipeline company has been very bouncy in a mostly upward trend. 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 (with 2.38 times cash flow coverage). Recent acquisitions and expansions ensure more solid growth going forward all the way out to 2028. BUY
Dividend Growth Tier
AbbVie (ABBV – yield 3.6%) Earnings – ABBV has moved higher since reporting fourth-quarter results that beat expectations last week. The company beat estimates on revenue and met them on earnings. Of course, earnings fell 22.5% and revenues were down 5.3% from last year’s quarter because of falling Humira revenues from increased competition after the patent expiration last year. However, that was expected, and the company raised guidance for the star immunology replacement drugs Skyrizi and Rinvoq.
Management expects combined sales to be $16 billion this year (Humira peak sales were $21 billion) and $27 billion in 2027. The company further expects to return to modest earnings growth this year and robust growth next year. The report indicates that AbbVie is closer to turning the corner than analysts expected. The market tends to anticipate six to nine months into the future and may start pricing in the robust growth expected next year before long. HOLD
American Tower Corporation (AMT – yield 3.6%) – This newly added cell tower property REIT had a very big move at the end of last year. Rising interest rates had been holding it back, along with the rest of the REIT sector, but the peaking and falling of interest rates reignited AMT more than its peers. That’s because it was dirt cheap with growing earnings and a lot of upside. The company also recently sold its India properties to Brookfield Infrastructure Partners (BIP) which eliminates some problems and provides $2 billion to firm up the balance sheet. Interest rate volatility has been pressuring the stock lower so far this year. Recent weakness provides a good entry point to buy the stock. BUY
Broadcom Inc. (AVGO – yield 1.7%) – This former solid dividend paying technology infrastructure stalwart turned into a sex symbol after artificial intelligence spending exploded last spring. The stock price has about doubled since then. AVGO tends to surge higher, then bounce around sideways for a while until the next surge higher. Even after fantastic returns for 2023, AVGO is up 15% YTD and 38% since early December. It looks like this earnings season will be another great one for AI stocks. Anticipation is lifting the stock still higher. Hopefully, the party will continue. HOLD
Digital Realty Trust, Inc. (DLR – yield 3.4%) – This data center REIT has been kicking butt since last spring. It’s up 50% since. DLR had leveled off since the beginning of November but has reignited recently. It’s up 7% YTD while the REIT sector is struggling. That’s because it trades more like a technology stock than a REIT. In a rotten 2023 for REITs, DLR posted a stellar 36% return. I believe REITs are poised for a better 2024 and DLR also has the additional catalyst of increasing AI spending. DLR should have a solid 2024 with REITs performing better and AI still in focus. BUY
Eli Lilly and Company (LLY – yield 0.8%) Earnings – What a beast! Lilly again killed on earnings this week and guided higher for 2024. The big pharma superstar crushed expectations with earnings growth of 19% for the quarter on 28% higher revenues. It’s highly watched, newly approved weight loss drug Zepbound more than doubled sales expectations for the quarter, even though it was only on the market for a few weeks. The mega-blockbuster potential is enormous, and Lilly just opened a $2.5 billion plant in Germany to crank up production to meet soaring demand.
The company also blew away expectations for its diabetes drug Mounjaro and cancer drug Verzenio. Mounjaro sales grew nearly 800% from last year’s quarter to $2.21 billion for the three-month period and Verzenio sales grew 42% to $1.15 billion. Lilly is already up 19% YTD and returns since being added to the portfolio in 2020 are approaching 400%. It never seems to stop trending higher. HOLD
Intel Corporation (INTC – yield 1.2%) – The chipmaker appears to be bottoming out after the ugly earnings report last month. INTC declined 14% since the report. The company actually exceeded expectations for both earnings and revenue in the fourth quarter, but it was next quarter’s guidance that repulsed investors. The company guided for earnings and revenues substantially less than what had been expected. Apparently, the bounty from the new chips and the foundry business won’t come as soon as optimistic investors had hoped. The future is still bright. There are great days ahead. But the recent spate of good news had investors hungry for more. They didn’t get it. BUY
McKesson Corporation (MCK – yield 0.5%) – Quietly, this pharmaceutical distributor company stock has risen to a new all-time high after rising 24% in a crummy year for the healthcare sector. MCK is also up over 7% YTD. This is a company with earnings that should continue to thrive even if the economy hits the skids this year. And McKesson will report fourth-quarter earnings tomorrow. It could get a bump. The company is basically an oligopoly in a market that grows all by itself with the aging population. BUY
Marathon Petroleum Corporation (MPC – yield 1.9%) – This oil refiner stock reported earnings that beat expectations a couple of weeks ago and the stock has since made a new all-time high. Despite the beat, earnings and revenues were significantly lower than last year’s quarter, which was expected as historically high margins from a year ago were never going to last. Yet, earnings and revenues remain very solid by historical standards. MPC is up over 12% YTD and is also poised to rise in the event of rising tension in the Middle East, which tends to lift all energy stocks. BUY
Qualcomm Inc. (QCOM – yield 2.1%) Earnings – The chip maker reported earnings and revenues that soundly beat expectations with 5% revenue growth and 16% higher earnings over last year’s quarter. It marked a return to earnings growth after four straight quarters of declines and the company guided slightly higher than expectations for the current quarter. But the stock fell 5% on the day of the report and is down over 9% from the late-January high as investors worry about the strength of the smartphone recovery, even though handset chip sales grew 16% in the quarter.
The decline is more about the absence of exciting news rather than bad news. QCOM had rallied 50% from mid-October to the recent high and expectations were quite high. But the news is still positive for the stock. The Semiconductor Industry Association is forecasting 13% growth in worldwide chip sales this year after a decline of 8.2% last year, despite a strong second-half recovery. Leaders like Qualcomm should experience a much higher level of growth than the overall industry. Qualcomm is introducing new AI chips for PCs and smartphones that could be big sellers this year. The dip presents a buying opportunity as shares are likely to be a lot higher by the end of the year. BUY
UnitedHealth Group Inc. (UNH – yield 1.5%) – This healthcare insurer has been sucking wind lately. It’s down 7% YTD as Wall Street didn’t like its fourth-quarter earnings report. The company reported double-digit earnings and revenue growth, but costs were higher than expected. The reasons were more elective surgeries after covid, extra vaccine activity and inflation. But the company doesn’t expect costs to have a negative impact on 2024 projections. The higher costs are likely temporary and can be easily overcome. It’s a good entry point if you don’t own UNH already. BUY
Rating change – “BUY” to “HOLD”
Visa Inc. (V – yield 0.8%) – You know who loves the current environment? Visa does. The economy is still strong and consumers, which showed signs of weakening late last year, are bounding with optimism again. That’s why V has spent this year making a series of new all-time highs. Earnings last month beat estimates with upbeat guidance through 2024. As long as the environment remains positive with a resilient consumer, V could continue to run higher from here. But the stock has moved above the ideal buy range. HOLD
Safe Income Tier
Alexandria Real Estate Equities, Inc. (ARE – yield 4.3%) – The recent jobs number and GDP have taken a toll on the more interest rate-sensitive stocks, and ARE has fallen 12% since mid-December after a big 40% move higher. But it’s just sector rotation shenanigans. The company is doing great. Earnings grew 6.5% and revenues were up 13%. Revenues also increased 11.5% for the full year. The stock sells at a compelling valuation, down more than 20% from a year ago, with reliable earnings, and should have a solid year as interest rates peak and perhaps trend lower. BUY
NextEra Energy (NEE – yield 3.3%) – The beleaguered combination regulated, and clean energy utility reported strong earnings that exceeded expectations again. It grew earnings 9.3% over the previous year in 2023 and reiterated its growth projections for this year, near the top of the estimated range. NEE only got a very slight boost from the positive report even though the stock has lost nearly a third of its value over the past year. But NEE is still way up from the low and trending in the right direction. This stock is still very oversold. It had been a market superstar that investors loved because it offered both defense and growth. It will rise again. BUY
Xcel Energy (XEL – yield 3.5%) – Utilities are still remarkably reliable revenue generators in any economy. Alternative energy is still the wave of the future. A combination of safety and growth is still highly desirable. But XEL has been a dog. It had a rotten two years until November and December when it turned sharply higher. But January has seen a return of ugliness as investors walked away from interest rate-sensitive stocks. But Xcel reported solid earnings on lower operating expenses. This is one of the best utility stocks to own and the recent debauchery may prove to be very temporary. BUY
USB Depository Shares (USB-PS – yield 5.5%) – The party isn’t over for fixed income. Rates have still peaked and may well trend lower for the year. The price has soared 25% from the low of late October and has provided a 17% 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 4.7%) – Ditto for VCLT, as evidenced by the recent 20% price surge. 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
High Yield Tier | ||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on Close 02/05/24 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| Brookfield Infrastructure Ptnrs. (BIP) | 6.75% | 31 | 50% | 5.20% | BUY | |||||
| Enterprise Product Partners (EPD) | 7.14% | 26 | 36% | 7.60% | BUY | |||||
| ONEOK Inc. (OKE) | 7.47% | 68 | 53% | 5.80% | BUY | |||||
| Realty Income (O) | 53 | 0% | 5.85% | BUY | ||||||
| The Williams Companies, Inc. (WMB) | 8/10/22 | 33 | Qtr. | 1.9 | 5.80% | 34 | 13% | 5.52% | BUY | 1 |
| Current High Yield Tier Totals: | 6.40% | 25.50% | 6.20% | |||||||
Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 171 | 179% | 3.62% | HOLD | ||||||
| American Tower Corporation (AMT) | 189 | -9% | 3.60% | BUY | ||||||
| Broadcom Inc. (AVGO) | 1243 | 199% | 1.70% | HOLD | ||||||
| Digital Realty Trust, Inc. (DLR) | 144 | 25% | 3.40% | BUY | ||||||
| Eli Lily and Company (LLY) | 706 | 386% | 0.70% | HOLD | ||||||
| Intel Corporation (INTC) | 43 | -5% | 1.20% | BUY | ||||||
| McKesson Corporation (MCK) | 508 | 11% | 0.50% | BUY | ||||||
| Marathon Petroleum Corp. (MPC) | 171 | 20% | 1.90% | BUY | ||||||
| Qualcomm (QCOM) | 144 | 88% | 2.20% | BUY | ||||||
| UnitedHealth Group Inc. (UNH) | 503 | -2% | 1.50% | BUY | ||||||
| Visa Inc. (V) | 12/8/21 | 209 | Qtr. | 2.08 | 1.00% | 276 | 34% | 0.75% | HOLD | 1 |
| Current Dividend Growth Tier Totals: | 3.00% | 64.10% | 1.90% | |||||||
Safe Income Tier | ||||||||||
| 118 | -5% | 4.30% | BUY | |||||||
| 56 | 42% | 3.30% | BUY | |||||||
| U.S. Bancorp Depository Shares (USB-PS) | 10/12/22 | 19 | Qtr. | 1.13 | 6.10% | 20 | 17% | 5.50% | BUY | 1 |
| 78 | 2% | BUY | ||||||||
| Xcel Energy (XEL) | 10/1/14 | 31 | Qtr. | 2.08 | 6.70% | 59 | 155% | 3.60% | BUY | 1 |
| 5.30% | 54.00% | 4.30% | ||||||||
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