May 3, 2023

A Big Week Starts Badly

A big week in the market has started badly. The failure of First Republic Bank (FRC) and fears of further fallout have sent stocks reeling ahead of more news the market may not like later this week.

The market moved on from the banking crisis. But it is rearing its ugly head again. There is now worry of more bank failures and an escalating crisis. More small regional banks could fail. But the situation is still unlikely to devolve into a major crisis, at least at this point.

This is the opening salvo for a week already packed with enough events to determine the near-term direction of the market. The Fed meets Wednesday when it is widely expected to raise rates by another 0.25%. The more important catalyst will be the Chairman’s comments after the decision. If he strikes a more hawkish tone than currently expected, there could be a selloff.

There are also important earnings from companies like Apple (AAPL), AMD (AMD), and Ford (F). Plus, the jobs report is due out and will likely provide valuable insight as to whether the economy is slowing, or inflationary pressures are continuing. There may be a lot more clarity as to the state of inflation and the Fed as well as the state of the economy by the end of the week.

It’s also important to note that stock prices may be at a crossroads. As of the end of last week, the S&P had rallied 20% from the October low and was up 8.5% YTD. If this is just another bear market rally, it’s probably about out of gas. That seems likely since stocks will have trouble mustering a sustained rally from here until there is more clarity on the Fed’s intentions and the possibility and timeline of recession.

Anything is possible. The market may confound my pessimism. But it still makes sense to play it safer at this point. There may be a huge buying opportunity late in the year. But I doubt this is it.

Recent Activity

April 12
Purchased UnitedHealth Group Incorporated (UNH) - $521.19

April 19
Eli Lilly and Company (LLY) – Rating change BUY to HOLD
Visa Inc. (V) – Rating change BUY to HOLD

April 25
BUY ½ position in NextEra Energy (NEE)

Current Allocation
Stocks 34.2%
Fixed Income 20%
Cash 45.8%

High Yield Tier

Enterprise Product Partners (EPD – yield 7.4%) – The volumes Enterprise processes are unlikely to be negatively affected even in a recession because of global supply issues. After a strong year in a bear market last year, EPD is up more than 13% YTD. A high yield and earnings that are resilient in inflation and/or recession should continue to be a winning formula for the rest of this uncertain year. (This security generates a K-1 form at tax time.) BUY

ONEOK Inc. (OKE – yield 5.8%) – This midstream energy company reports earnings after the close on Tuesday. Earnings have been solid and the natural gas and natural gas liquid assets it traffics are resilient and have a bright future. Natural gas prices have plunged because of the unusually warm winter and, although ONEOK is not leveraged to prices, it can be negatively affected by the industry. But it is a short-term problem and earnings should remain solid in inflation and/or recession. BUY

Realty Income (O – yield 4.9%) – In a highly uncertain environment like this, where the narrative can change on a dime, income is king. And this legendary income REIT is the king of income stocks. The returns haven’t been inspiring so far. But this stock has held its own in a bear market. As the economy slows and moves towards recession, investors will continue to demand safety and O is a highly desirable safe income stock. HOLD

The Williams Companies, Inc. (WMB – yield 5.9%) – WMB has been a struggling stock this year because of natural gas prices, which, as I mentioned above, have crashed primarily because of the warm winter. Demand for the fuel has been far less than anticipated and stockpiles have built up. But it is a temporary problem for a fuel source that should own the next decade. Williams reports earnings this week, and the company’s quarterly results have been solid. Maybe earnings can get it moving again. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.9%) – This is a tricky year for AbbVie as its U.S. Humira patent expires. Humira has been the world’s best-selling drug with $20 billion in annual sales. This expiration has been anticipated for a long time and the stock valuation reflects the concern. The stock had been navigating this year well until last week’s earnings.

Humira sales fell sharply but less than expected. Its new autoimmune drugs that are expected to pick up the slack in the years ahead posted sales that were below expectations. The market was disappointed and ABBV fell 8% on the day of the report, although it has since recovered somewhat. Big pharma companies often have issues like this along the way. But AbbVie still has an amazing pipeline that will serve it well. The stock should do quite well once investors look past the Humira expiration. HOLD

Broadcom Inc. (AVGO – yield 2.9%) – AVGO is a highly resilient technology company that is mostly involved in technology infrastructure and earnings are not highly dependent on product sales. In the ugly technology market, AVGO returns have been even since the sector began to sell off at the beginning of last year. It’s also up over 40% since the low of last October. Although it is still somewhat tied to the fortunes of the technology sector in the short run, it’s a great stock that has shown resilience in a tough market and should take off when the sector recovers. HOLD

Brookfield Infrastructure Partners (BIP – yield 4.4%) – The infrastructure juggernaut has been bouncing around to nowhere since the end of 2020. The stock had been held back more recently by a strong dollar and higher lending rates, but those things have been receding and BIP has been acting better. It recently hit the highest price level since last fall until pulling back again but it’s still up 10% YTD. The stock is now right around the midpoint of its 52-week price range and should be a solid holding amid inflation and/or recession. Brookfield reports first-quarter earnings this week and the stock could get a lift. (This security generates a K-1 form at tax time.) BUY

Eli Lilly and Company (LLY – yield 1.4%) – LLY continues to be on fire. It just hit a new all-time high in a bear market. The stock is up about 27% since it was upgraded to a buy in early March. After moving to a new high, LLY got another spike from earnings last week. Earnings slightly beat estimates and the company did raise guidance for the year. But the main catalyst was the reporting of very promising results from its obesity drug tirzepatide. Obesity is a massive problem, and this drug shows far more promise than any other drug out there. This report greatly increases the chances that this potential mega-blockbuster drug will be approved. HOLD

Intel Corporation (INTC – yield 1.6%) – The chip maker reported earnings last week that cleared a very low bar and beat expectations. The main problem is weak PC sales in a struggling economy and most chip makers have cut their forecasts amid weakening demand. But there are signs that the ambitious turnaround strategy may be working, and far better results are around the corner.

The recent earlier-than-expected release of their new data center chip indicated production issues are behind them and bodes well for planned chip launches going forward. After an awful 2022 where INTC plunged nearly 50%, it appears that the worst is over and things should continue to improve. The stock is up 13% YTD and has broken out to the highest price level since last summer. HOLD

Qualcomm Inc. (QCOM – yield 2.8%) – The chip company stock recently raised the quarterly dividend to $0.80 per share from $0.75. This is a great long-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. But QCOM is also vulnerable to the overall technology sector in the near term. It is likely that a tech recovery should come sooner than an overall market recovery as interest rates and inflation recede in a slowing economy. Earnings will be reported on Wednesday and chip makers have not been positive so far this earnings season. But QCOM has already moved down a lot since hitting a recent high of nearly 140 per share at the beginning of February. HOLD

UnitedHealth Group Inc. (UNH – yield 1.3%) – This recent portfolio addition has strong predictable revenues in a very defensive business ahead of a likely recession later this year. UNH has been a terrific stock to own in any market, as its three-, five- and 10-year returns attest. But it is also the epitome of a stock to own during an economic downturn. It has pulled back since being added to the portfolio, but I expect the stock to be solidly higher in the months ahead. BUY

Visa Inc. (V – yield 0.8%) – V has been hanging very tough near the high point of the recent range. The payments processing company once again exceeded expectations on earnings. Visa grew earnings per share by 17% and revenues grew double digits versus last year’s quarter. And this is what the company does in a bear market with the economy slowing. It can really take off when the market recovers for good. V should be higher by the end of the year but there is a chance it pulls back somewhat after moving to recent highs. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 2.4%) – This combination regulated and clean energy utility stock has bounced around over the past two years and is currently at the lower end of that range. It has been trending higher since the beginning of March as the risk of recession has grown and defensive stocks have outperformed. NEE is still well positioned as a defensive stock with growth in a highly uncertain market where a recession is becoming more likely. BUY

Xcel Energy (XEL – yield 3.0%) – This clean energy utility stock got knocked around a little bit in the tough market for defensive stocks in the early part of this year. But defensive stocks are springing back as a recession later this year becomes more likely. Utilities and healthcare have been among the top performing sectors over the past month. And with a recession possibly looming, XEL should remain a good place to be. BUY

USB Depository Shares (USB-PS – yield 5.8%) – 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. It also has pulled back recently as the banking crisis flared up after the recent failure. But U.S. Bancorp is one of the most solid big banks and this preferred issue should spring back up after panic abates. BUY

Invesco Preferred ETF (PGX – yield 6.2%) – Longer-term rates are bouncing around again with a bias toward lower since the bank failures increased the risk of recession later this year. This fund is also vulnerable to fluctuations resulting from banking troubles and many preferred issues are those of banks. The fund is only threatened if things escalate into a more widescale problem. 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