November 1, 2023

The Market Waits on the Fed and the Middle East

The market officially entered a “correction” last week when the S&P fell 10% from the 52-week high on a closing basis. Now, it’s largely up to the Fed to determine where the market goes next.

The Fed meets on Wednesday and will decide on the Fed Funds rate. They are widely expected to leave the rate unchanged and then indicate they might raise it in the future. But the main event isn’t the Fed Funds rate. It’s the benchmark 10-year Treasury yield.

The more important part will be the statements following the decision. The 10-year is flirting with the crucial 5% level. The benchmark rate could peak here for now, which would be good for the market, or it could move above 5%, which would be bad news. The Fed could say things to prompt the rate to rise (doing the dirty work for them) or they could chill out. That’s what the market is waiting to see.

At the same time, the situation in the Middle East may be coming to a crossroad. The next week or two may well determine whether the fighting in Gaza spreads into a wider conflict. Investors will certainly be closely watching how it plays out.

Then there’s earnings season. Although growth has so far returned, big tech company results have been mixed. The market likely needs leadership from the biggest sector to move significantly higher. Things could brighten on the earnings front. But the market will likely need some resolution on the 10-year rate and the Middle East to muster lasting upside traction.

It’s a very important week that may determine the market’s direction for the rest of this year. This week may well decide if the market is near a low and there are buying opportunities, or if it will take another downside drubbing from here. Stay tuned.

Recent Activity

October 4
SELL Invesco Preferred ETF (PGX)
USB Depository Shares (USB-PS) – Rating change “BUY” to “HOLD”
Vanguard Long-Term Corp. Bd. Index Fund (VCLT) – Rating change “BUY” to “HOLD”

October 11
Purchased McKesson Corporation (MCK) - $456.66
ONEOK, Inc. – Rating change “HOLD” to “BUY”

October 25
Hess Corporation – Rating change “BUY” to “HOLD”

High Yield Tier

Enterprise Product Partners (EPD – yield 7.6%) – Even the previously rock-solid midstream energy company stocks are taking a drubbing in this market. EPD is down about 7% from the 52-week high made earlier this month. Enterprise also reported earnings Tuesday that were about the same as last year’s quarter and lower than expected. Lower prices for natural gas liquids (NGLs) offset higher volumes across the board. The stock fell over 2% on Tuesday morning.

However, the partnership increased the distribution 5.3% in the quarter because of steady and predictable cash flows. In addition, Enterprise is expanding operations in the high-growth Permian Basin. The earnings hiccup is likely a one-off for the quarter. The more important gauge is the volume of throughput, which showed stellar growth. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.8%) – This historically more volatile midstream energy company stock plunged after soaring in the first half of October. Most midstream energy companies took it on the chin along with just about everything else over the past couple of weeks. That’s been the trend. But typically the midstream companies come right back when the market stabilizes. OKE could get a boost when it reports earnings on Tuesday as it has already raised its guidance for the year. BUY

Realty Income (O – yield 6.7%) – Shares of this already beaten down retail REIT fell another 5.6% Monday. The REIT announced plans to purchase Spirit Realty Capital (SRC) for $9.3 billion. It is slated to be an all-stock transaction that Realty estimates will increase its annual adjusted funds from operations (AFFO) by 2.5%.

Acquiring companies usually fall on the day of the announcement regardless of the wisdom of the deal. In the near term, it will be dilutive to existing shares as Realty will issue new shares for the buyout. It will also increase debt. However, Realty has often proven that it is adept at acquiring companies to its benefit. Shares will still be rated BUY for now on the possibility of a bounce back in the days following the announcement. BUY

The Williams Companies, Inc. (WMB – yield 5.2%) – The midstream energy company made a new 52-week high earlier this month but has since pulled back a little in the turbulent market. Midstream energy companies are dividend stocks that have held up relatively well. While other more defensive dividend-paying stocks are struggling, midstream energy companies have been rolling merrily along. Williams also operates in an inflation-resistant business and revenues should remain solid even in a slow economy. Williams also reports earnings on Wednesday. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 4.4%) – It’s been a rollercoaster week for ABBV as shares plunged more than 4% last week and then the stock retrieved about half of the losses on Monday. Last week’s plunge was a reaction to the third-quarter earnings report. Although the company beat expectations and raised guidance for the year, as well as the dividend, sales of its cosmetic treatments (including Botox) disappointed and Wall Street didn’t like that. However, the company received analyst upgrades this week.

Healthcare is a good sector to be in when the overall market struggles. Shrinking Humira revenues should be overcome with its strong new drugs and pipeline in the future. The stock sells at a low valuation and investors sense that it might turn the Humira corner sooner ahead of a very bright future. BUY

Broadcom Inc. (AVGO – yield 2.2%) – You know things are bad in the market when this AI juggernaut flounders. But the stock price is still within the higher range achieved after the spring and summer surge. There is resistance above the 800 per share level. We’ll see if it can hold that level. If not, it will probably present an opportunity to buy back one half of the position sold earlier. Artificial intelligence gives the company a huge growth catalyst going forward, and it isn’t going away. HOLD

Brookfield Infrastructure Partners (BIP – yield 6.9%) – It’s a tough market for defensive dividend stocks and BIP is getting clobbered. It’s down 34% in the last three months. Despite strong operational performance, the stock performance just keeps getting worse. Sure, rising interest rates hurt companies like this because they have high relative debt and competing fixed rate investments become more competitive. But this performance has been too ugly for just that.

It may be that the infrastructure company has been acquiring more assets in cell towers and data centers as well as a huge joint venture with Intel for semiconductors. Those areas tend to be more cyclical than other infrastructure assets like toll roads and power lines. The recent decline is likely a combination of interest rates and increased exposure to technology. Hopefully, the earnings report on Wednesday will remind investors of the steady and predictable income. (This security generates a K-1 form at tax time). BUY

Digital Realty Trust, Inc. (DLR – yield 4.0%) – This data center REIT reported solid earnings last week that were in line with expectations. Revenue was up 18% and adjusted EBITDA increased 11% from last year’s quarter. DLR has been trending higher since the report. The long-term prognosis is solid because voracious AI spending upgrades should provide another growth catalyst, in addition to a move toward the cloud. The near-term movement can be sensitive to the REIT market (which may have bottomed out), technology sector performance, and the direction of the overall market. BUY

Eli Lilly and Company (LLY – yield 0.8%) – What the heck: Even LLY has pulled back in this market. But, like AVGO, LLY is at the lower end of the higher range established after the surge earlier this year. It’s still in an uptrend and there is resistance around the current price level. Should the stock fall further because of an ugly overall market, it will present an opportunity to add back the half position sold earlier. Investors are unlikely to sour on LLY because it has two potential mega blockbuster drugs up for FDA approval this year as well as stellar earnings growth for the next several years. It reports third-quarter earnings this Thursday (November 2). HOLD

Hess Corporation (HES – yield 1.1%) – Chevron Corporation (CVX) is buying Hess for 1.025 shares of CVX for every HES share, scheduled to close sometime early next year. Because of the purchase, Hess shares trade just like CVX shares. Last week, Hess reported better-than-expected earnings on higher volumes. But Chevron earnings disappointed because of refining weakness. As a result, HES shares fell.

The portfolio will continue to HOLD the HES shares for now. The current Middle East turmoil could cause a significant rise in oil prices and CVX stock if the conflict spreads. The current situation offers more upside potential than downside risk. HOLD

Intel Corporation (INTC – yield 1.4%) – It has been a big up and down week for INTC. The stock plunged 9.8% in the first four days of last week on news that three big chip giants are gunning for Intel’s PC chip stronghold. Serious competition to Intel’s PC dominance could be a problem. Then, the company reported earnings on Friday that blew away expectations and the stock soared 9.3% on the day, making up almost all the losses from earlier in the week.

Earnings indicate that Intel’s turnaround in well on track. It has promising new chips coming out in high-growth areas and its foundry business could be huge. The company also expressed confidence that the other chip makers will not significantly compete for Intel’s chip dominance anytime soon. The competing news has left the stock price right about where it was a week ago and the future still looks bright. BUY

McKesson Corporation (MCK – yield 0.5%) – The market will bounce around in the near term. Sector performance rotates. In six months, we could have a solid economy or a recession. But McKesson’s business will continue to hum along regardless of what happens. It caters to a market that is growing all by itself and demand is unaffected by inflation, the Fed, GDP, or whoever is President. I don’t know what the next month holds for MCK (earnings are due out Wednesday), but the longer term should be stellar. BUY

Qualcomm Inc. (QCOM – yield 3.0%) – The chipmaker stock continues to struggle through this year. It’s a little soon for Qualcomm to benefit from AI upgrades, as they haven’t made their way into smartphones yet. Smartphone sales may have bottomed out. We will get a better idea when Qualcomm reports earnings on Wednesday. The stock sells at a forward P/E ratio of 11, which is cheap considering the cycle and the growth opportunities in the internet of things and other AI applications. BUY

Tractor Supply Company (TSCO – yield 2.1) – The country’s largest rural retailer fell nearly 6% since disappointing on earnings last week. Earnings increased 11% over last year’s quarter and net sales were up 4.3%. But the revenue number was slightly below what was expected. The company also slightly lowered guidance for the full year, citing lower demand for seasonal products due to a weaker consumer. This is an unforgiving market. A worse than expected report is asking for it in this cranky market. BUY

UnitedHealth Group Inc. (UNH – yield 1.3%) – Last week’s earnings report missed estimates slightly, due to temporary factors, and revenue grew 8.3% over last year’s quarter. The company also reiterated guidance for 7.5% earnings growth for the full year in 2023. The stock is higher since the report, and everything looks solid going forward. UNH is well positioned as a defensive company with highly reliable and predictable revenue in an uncertain environment. Its market grows all by itself because of the aging population. Hopefully, the positive momentum will reignite as the market stabilizes. BUY

Visa Inc. (V – yield 0.8%) – Visa reported earnings last week that beat expectations because of a resilient consumer. Earnings soared 21% and revenue increased 10.6% over last year’s quarter. The stock edged slightly higher in a tough market. The company also announced a large share buyback and a dividend increase.

It could take off again if the good economic news continues and the consumer stays strong. But it has also shown resilience in lousy environments. V returned -3.4% in last year’s bear market. It should be a longer-term winner. We’ll see what happens in the next few months. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 3.3%) – Better times have finally arrived for this previously beleaguered clean energy utility stock. NextEra reported earnings last week that beat estimates and grew 10.6% from last year’s quarter. NEE shares spiked more than 8% for the week. NEE has also made a very convincing move off the low. It’s now up 23% from the low made earlier this month. It is welcome news for a stock that had been down 35% YTD. Management also reiterated previous growth projections and said the company expects to deliver earnings near the top of the expected range through 2026. The selling was way overdone. Hopefully, the momentum continues. HOLD

USB Depository Shares (USB-PS – yield 6.7%) – This preferred issue has had a tough month and now sells at the lowest price since being added to the portfolio. The reasons are high interest rates and the Fed’s “higher for longer” prognosis. But this investment grade fixed income vehicle now yields 6.8%. And interest rates may be peaking. HOLD

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 5.0%) – There could be some near-term turbulence with the price. This long-term bond fund is vulnerable to rising interest rates. There is a good chance rates will be lower than they are now down the road, but they could go higher in the near term. HOLD

Xcel Energy (XEL – yield 3.5%) – The clean energy utility reported earnings last week that slightly missed estimates. But the stock didn’t decline much because it is so beaten down already. The lows may be in. XEL had a convincing 10% 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 is now selling close to the pandemic bear market lows of three years ago ahead of a likely slowing economy. Even if interest rates do hurt earnings, the damage is already priced into this stock. BUY