March 29, 2023

A New Bear Market Phase?

There’s a new worry in the market – recession. Just when the Fed is finally chilling out, investors are moving on to the next bummer. The market still stinks, just for different reasons.

Until a couple of weeks ago the main concern was a more hawkish Fed. But the banking situation has mellowed the Fed, and the Central Bank just indicated it is nearly done hiking rates. It’s a relief on the Fed front but the economy could be a problem now.

It isn’t necessarily a bad thing though. The shift in investor angst may be a good thing because it expedites the end of this painful cycle. This was always going to be a process. The Fed hikes rates until the economy tanks (and hopefully brings inflation down to earth). Then investors fret about the economy. Then investors sniff out the economic bottom and the market rallies into the next bear market.

Up until a couple weeks ago, the Fed phase of this process looked like it would last for many more months and possibly quarters. The Promised Land rally seemed a long way off. But we have seemingly jumped the line to the tanking economy phase. That glorious rally may only be six months or so away instead of a year or more.

Of course, the timing and severity of a possible recession is still unknown. And we’ll see if inflation falls in a meaningful way. We’re not out of the woods yet. Things may get worse before they get better. But the parole board may have just given the thumbs up to an earlier release from this bear market prison.

We may have moved ahead to a later phase of the cycle. But it’s still a painful phase. And defense is still king.

Recent Activity

March 8
Medical Properties Trust (MPW) – Rating change “BUY” to “HOLD”
Eli Lilly and Company – Rating change “HOLD” to “BUY”
Xcel Energy Inc. (XEL) – Rating change “HOLD” to “BUY”
Visa Inc. (V) – Rating change “HOLD” to “BUY”

March 22
SOLD Medical Properties Trust, Inc. (MPW) - $7.40

Current Allocation
Stocks 30.2%
Fixed Income 20%
Cash 49.8%

High Yield Tier

Enterprise Product Partners (EPD – yield 7.8%) – After moving up to the highest price level since last summer, EPD has pulled back over the past month. It’s only down a few percent over that time and still has a positive 7.13% return YTD. EPD also returned 18.4% in 2022 when the S&P was down 19.4% for the year. Sure, it isn’t exciting but a stock that provides decent appreciation while providing a massive and secure 7.8% payout is a great place to be in a bear market. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 6.5%) – OKE tends to be more volatile that other midstream energy companies. The past month has been a downward move for the energy sector as prices have fallen, and OKE fell over 10%. But that should be a buying opportunity because ONEOK has the right stuff for the current market environment. It has resilient earnings that can handle recession and inflation adjustments build into its long-term contracts. It also pays a high and safe dividend. BUY

Realty Income (O – yield 5.0%) – In a rudderless and directionless market, income is king. And this legendary income REIT is the king of income stocks. It has paid 632 consecutive monthly dividends and increased the dividend payment 119 times since its IPO in the 1990s. And the REIT has been growing stronger through acquisitions of late. Earnings grew at 9.2% for 2022, which is above the historical average, and it did it in a challenging year. Despite being a retail REIT, the portfolio is largely staple properties like drug stores and supermarkets that are resilient in a slower economy. O should continue to be an investor favorite in this tough market. HOLD

The Williams Companies, Inc. (WMB – yield 6.2%) – Although Williams reported solid earnings last quarter with 21% full-year growth over 2021, the company expects slower growth of just 3% in 2023 as the benefit of recent acquisitions draws tougher comparisons. But the dividend is rock solid with 2.37 times coverage from cash flow and future growth is likely to resume at a stronger clip in the years ahead. The stock is currently selling near the 52-week low and is a bargain considering the dividend yield and earnings resilience. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.8%) – This is a transition year for AbbVie as its mega-blockbuster immunology drug Humira faces a U.S. patent expiration. Sales of the peak $20 billion in annual revenue drug are estimated to drop 37% this year and company revenues are expected to decline in 2023 as a result.

However, this expiration has been factored into the price for years now and ABBV sells at a very low multiple versus its peers. It also has one of the best pipelines in the business and its two newer immunology drugs (Rinvoq and Skyrizi) are expected to generate $17.5 billion in revenue in 2025 and 21 billion in 2026. It’s encouraging that the stock has been trending higher since September and indicative that the expiration is already priced in and investors are looking ahead to a bright future. HOLD

Broadcom Inc. (AVGO – yield 2.9%) – AVGO was added to the portfolio because it is a highly resilient technology company that is mostly involved in technology infrastructure and earnings are not highly dependent on product sales. That’s why in a tough technology market AVGO has returned 13% YTD and recently hit a new 52-week high. The stock is still in a steep uptrend that began in October and could move a lot higher when the technology sector recovers. HOLD

Brookfield Infrastructure Partners (BIP – yield 4.8%) – The infrastructure juggernaut has bounced around and gone nowhere for the last two years. It has been hurt by the strong dollar and higher interest rates as the company does a lot of business overseas and has a relatively high credit balance. But the dollar has been weakening since November and interest rates may have topped out. BIPC has been forming a solid base at current levels. The stock is well below the 52-week high made last April and it still has very resilient earnings, a great track record, and a safe dividend. The consistent earnings should serve the stock well as the S&P 500 is likely to suffer another year-over-year earnings decline in the next quarter at least. (This security generates a K-1 form at tax time). BUY

Eli Lilly and Company (LLY – yield 1.4%) – After a stellar 2022 where it returned 34% in a bear market, LLY is having a tough time this year, although it has been moving higher lately. LLY is notoriously bouncy and tends to pull back after every surge. Despite the recent earnings stumble, this company still grew earnings 12.7% in 2022 and is expected to grow earnings by an average of 22% per year over the next five years. It also has two drugs that could be mega blockbusters in the pipeline that could be approved in the next year. Because of the recent price dip, the strong earnings outlook, and the possibility of big upside news, LLY was recently upgraded to a BUY. BUY

Intel Corporation (INTC – yield 1.7%) – This beleaguered stock continues to provide evidence that it has bottomed. The news has been even worse so far this year with the dividend cut and lower-than-expected earnings. But the stock was very beaten down already. Even with all this bad news the stock has rallied about 17% over the past month and it’s up 12% YTD. Intel is still a powerful industry player and its recent attempts to catch up to its competitors should succeed to a least some degree over time. Meanwhile, the stock sells at a fire-sale price at just above book value. HOLD

Qualcomm Inc. (QCOM – yield 2.4%) – This is a great longer-term stock of a company with a huge share of mobile 5G chips and strong exposure to some of the fastest growing areas in technology. Meanwhile, it sells at a very cheap valuation by historical standards. But the stock is getting pushed around by this market and is vulnerable to weakness in the overall technology sector. It falls when investors turn negative on the fear of inflation and rising rates and then rallies when the perception changes, like with the recent banking crisis. At some point this year, the market should start sniffing out the recovery. And QCOM can make up for lost time fast when it moves. HOLD

Visa Inc. (V - yield 0.8%) - V is tied to the fortunes of the more cyclical stocks in the near term. But it tends to outperform that group. It held up nicely in a very tough 2022 with a -3.4% return for the year, it’s up 25% since the September low, and it has a positive return YTD. Of course, it could be under pressure if the economic situation deteriorates. But the stock is still relatively cheap and it should fly when the market eventually senses the end of this cycle and the next recovery. BUY

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 and NEE fell 17% in six weeks before moving higher again this 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. The stock is still in a lower recent range ahead of a period where defensive stocks could thrive as most companies struggle with earnings and NextEra’s remain solid despite the economy. BUY

Xcel Energy (XEL – yield 3.2%) – This clean energy utility stock is also trading in a lower range since selling down in the first two months of the year, although it’s moving higher this month. Meanwhile, the market remains uncertain, and the economy is likely to slow. It’s a good stock to buy almost anytime. But after having gotten cheap ahead of a period of likely relative outperformance, XEL is a good place to be. BUY

USB Depository Shares (USB-PS – yield 5.4%) – This preferred stock has bounced around with interest rates since being added to the portfolio, moving lower when long-term interest rates rise and vice versa. But interest rates have plunged since the banking problems and increasing fear of recession and this stock has moved higher again. The 10-year rate seems to top out around 4% and then pull back. BUY

Invesco Preferred ETF (PGX – yield 5.8%) – Longer-term rates are bouncing around and have recently been moving lower again. 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 if the economy weakens. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.4%) – There could be some near-term turbulence with the price on the way to solid longer-term returns and diversification. The increased risk of a recession this year bodes well for the near-term total return of this fund. BUY