January 24, 2024

The Interest Rate Trade Isn’t Dead

After the stellar finish to last year, the market rally is continuing, sort of.

The S&P 500 is up for the year. But it’s only up 1.69% and participation is far less broad than it was. Technology stocks are driving the market higher but most of the other sectors are down. The AI euphoria is continuing, but the interest rate rally is gone.

Defensive dividend stocks that had soared in the last two months of 2023 are floundering so far this year. But I don’t think the good news is over for these stocks. The rally is just being interrupted while investors grapple with the likely reality that they won’t get a “soft landing” and rate cuts.

The more interest rate-sensitive dividend stocks in REITs and utilities rallied strongly in November and December as the Fed indicated it was done hiking the Fed Funds rates and longer-term rates peaked and moved lower. But the Fed has since pushed back against the idea of lowering rates starting as early as March.

No matter, rates have still peaked. It is highly unlikely that the benchmark 10-year Treasury rates will rise near the 5% peak again unless things completely reverse. That should take pressure off these interest rate-sensitive stocks. There is also a good chance that rates trend lower over the course of the year as the economy at least slows down. Meanwhile, many of these stocks are still dirt cheap. Don’t be disheartened by the market gyrations in the first few weeks of the year. These stocks are still good buys.

Meanwhile, the technology stocks are still hot as the artificial intelligence catalyst continues and a rebound in the semiconductor industry appears likely this year. All three technology positions, Broadcom (AVGO), Qualcomm (QCOM), and Intel (INTC), have made new 52-week highs this month. The good times should continue throughout the year.

Many portfolio positions report earnings this month. Amid the lackluster rally, the nature of the earnings reports are likely to have a significant effect on the stock prices. I will keep you posted.

Recent Activity

January 10^th
Purchased American Tower Corporation (AMT) - $208.97

January 17^th
AbbVie Inc. (ABBV) - Rating change “BUY” to “HOLD”

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 5.0%) – Like many other safe dividend stocks, BIP had a strong resurgence at the end of last year as interest rates peaked. But unlike most of these stocks, BIP has held very steady during what has been an ugly January for defensive dividend stocks. It is still a great stock at a cheap price. The high distribution and highly reliable infrastructure earnings are still highly desired. It looks like 2024 should be a great year that makes up for some lost time. (This security generates a K-1 form at tax time). BUY

Enterprise Product Partners (EPD – yield 7.4%) – This midstream energy partnership comes as advertised. EPD will bore you to prosperity. It posted a solid 17.45% return in 2023 after a strong bear market return of 15% in 2022. EPD also hasn’t lost a thing in the rocky start to this year. That massive 7.4% yield is very well supported and safe. Adding capital appreciation to that makes a fantastic income investment. The growth in profits and distributions is likely to continue as the partnership is expanding operations in the high-growth Permian basin. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.7%) – 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 5.5%) – 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, in my view, temporarily. It is still a great stock at a cheap price. Receding inflation and interest rates remove the main downside catalyst that has been in place for the past two years. And its retail staple properties and new data center acquisitions should produce reliable revenue in just about any economy. BUY

The Williams Companies, Inc. (WMB – yield 5.3%) – Midstream energy companies should have the right stuff for the current environment. Demand for energy services should remain solid even if the economy slows and they are insulated from inflation with automatic price adjustments built into the long-term contracts. Williams has highly resilient revenues that even grew during the pandemic, and it pays a well-supported dividend (with 2.38 times cash flow coverage). Recent acquisitions and expansions ensure solid growth all the way out to 2028. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.8%) – ABBV has been bouncing around in a range since hitting a high in April of 2022. It is now at the top of that range and just set a new 52-high this week. The future is bright as AbbVie has one of the best pipelines in the business. But it is still struggling with the Humira patent expiration and is not expected to grow earnings again until next year. The market likes that AbbVie is purchasing biotech company ImmunoGen (IMGN) for $10.1 billion and Cerevel Therapeutics (CERE) for $8.7 billion. Both deals should enhance the already strong pipeline longer term. But ABBV may be near the top of the near-term range. HOLD

American Tower Corporation (AMT – yield 3.3%) – 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. But that 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. AVGO has exploded 97% higher since then. The stock tends to surge higher, then bounce around sideways for a while until the next surge higher. Even after fantastic returns for most of 2023, AVGO is up 35% 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 3.5%) – This data center REIT trades more like a technology stock than a REIT. In a rotten 2023 for REITs, DLR posted a stellar 36% return. And despite the rough start to this year for REITs, DLR is up 4% YTD and just made another new 52-week high. I believe REITs are poised for a strong 2024 and DLR also has the additional catalyst of increasing AI spending and is getting a boost from the AI craze. DLR should have a solid 2024 with REITs performing better and AI still in focus. BUY

Eli Lilly and Company (LLY – yield 0.8%) – Last week, LLY hit a new all-time high. This superstar big pharma stock has been a lot like AVGO. It periodically surges higher and then consolidates by going sideways for a while until the next surge higher. LLY closed with a 2023 return of 60% and an average annual return of 52% over the last three years. LLY is already up double digits in 2024. The good times may continue.

Weight loss drug Mounjaro was approved by the FDA in November. Some analysts estimate it could potentially be a $20 billion per year drug. That would match the best-selling drug ever. It still has its Alzheimer’s drug up for FDA approval in the months ahead. Earnings are expected to grow at about a 25% per year clip over the next several years, but that number could be higher with the new drugs. HOLD

Intel Corporation (INTC – yield 1.0%) – INTC soared more than 50% between late October and the end of the year and finished 2023 with a spectacular 93% return. Earnings indicate that Intel’s turnaround is well on track. It has promising new chips coming out in high-growth areas and its foundry business could be huge. The stock got dirt cheap, and investors are increasingly willing to bet on the company’s future. I expect this to be another strong year for Intel as the turnaround to profitability comes to fruition. 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. This is a company with earnings that should continue to thrive even if the economy hits the skids this year. It’s also encouraging that it performed well in a 2023 market that left most healthcare stocks behind. The company is basically an oligopoly in a market that grows all by itself with the aging population. The stock has an amazing track record, and it should continue to thrive in 2024. BUY

Marathon Petroleum Corporation (MPC – yield 2.1%) – This oil refiner stock sort of bounces around with the energy sector, except better. When energy stocks get hot, MPC gets hotter. When the energy sector is sucking wind, MPC still does good. Even though the energy sector posted a negative return for 2023, MPC returned a solid 30% for the year. While the environment can vary from quarter to quarter, it should remain an overall profitable environment for refiners over the next several years. MPC also has the advantage of spiking higher if there is more trouble in the Middle East and thriving if the economy is stronger than expected. BUY

Qualcomm Inc. (QCOM – yield 2.1%) – QCOM is catching fire. It went up about 10% in just the last few days to a new 52-week high and is near the highest level since early 2022. The recent catalyst is that semiconductor companies that have reported earnings are confirming that the semiconductor industry could have double-digit growth this year after contracting last year. Leaders like Qualcomm should experience a much higher level of growth than the overall industry. This is a company that will benefit from the AI revolution later than the 2023 movers and shakers. But the revolution will come to mobile devices. Qualcomm is introducing new AI chips for PCs and smartphones that could be big sellers next year. When QCOM moves it can make up for lost time. BUY

UnitedHealth Group Inc. (UNH – yield 1.5%) – This healthcare insurer has been sucking wind lately. It’s down over 7% since the end of November and fell 3.4% after Wall Street didn’t like its fourth-quarter earnings reports. 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 great entry point if you don’t own UNH already. BUY

Visa Inc. (V – yield 0.8%) – These are great times for this payment processing company stock. It’s up 18% since the end of October, 5% YTD, and it has been making new highs all year so far. The still-strong consumer is lifting the stock even further. Visa reports fourth-quarter earnings later this week and is likely to get a further boost. Recent earnings have been stellar as international business and travel is thriving. There is no reason to believe that recent strength didn’t continue in the fourth quarter. It has a strong business that should remain solid in all but a recessionary environment. HOLD

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.1%) – ARE has soared over 40% since the low of late October. But we didn’t miss the boat. The stock is still more than 40% below the all-time high. ARE sold off more than it should have because of its association with office REITs. But it has been among the very best performers of its peers since interest rates peaked. The company also has a highly reliable and growing business that should thrive in any economy. It’s cheap with strong momentum ahead of a period of likely strong performance as interest rates abate. It has leveled off in the past month or so but could have another leg higher before long. BUY

NextEra Energy (NEE – yield 3.3%) – After a rotten couple of years, NEE trended sharply higher in the last two months of last year but has been laying an egg again so far this year. But it’s way up from the 52-week low and it looks like we have seen the bottom if this cycle. The clean energy utility delivered solid earnings and management reiterated previous growth projections and said the company expects to deliver earnings near the top of the expected range through 2026. NextEra reports earnings this week. Hopefully, that will break the recent malaise. 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

USB Depository Shares (USB-PS – yield 5.7%) – The party isn’t over for fixed income. It is just interrupted for now. Rates have still peaked and may well trend lower for the year. The price has soared 24% from the low of late October. 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 rates move lower, there should be more upside for the price. 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. The last two crummy years are not what this stock is about. XEL has been trending higher since the beginning of last month and it’s had a convincing 18% move off the low. This is one of the best utility stocks to own and the recent debauchery may prove to be very temporary. XEL still sells near the lowest levels of the past several years and should deliver positive results this year. BUY