November 16, 2022

Lower Inflation and a Big Rally

What a difference a few weeks can make. The S&P 500 has moved up 15% from the low of October. Have we turned the corner on this bear market?

The main catalyst is a slower-than-expected inflation report. While still unacceptably high, inflation showed real signs of slowing in October. That means the Fed could be done hiking rates sooner. The chief cause of this bear market, rising inflation and a hawkish Fed, show signs of abatement. The market tends to anticipate six to nine months ahead and is starting to see inflation under control and a Fed done hiking by then.

Of course, similar hopes and a similar rally were dashed this past summer. But the rate hikes are starting to take a toll on the economy. And the economic stink is starting to quell this inflation. Even if we turn the corner of inflation and this Fed cycle, the market will have to contend with recession and plunging corporate earnings. But we may be moving on to a new phase. And that’s progress.

Hopefully, this market never looks back and the low is in. But it’s also possible that this is just another bear market head-fake. We’ll see. But interest rates and related investments may have already turned the corner. Cooler inflation and a slowing economy have knocked the ten-year Treasury rate down to 3.72% from a recent 4.3% high.

This portfolio added fixed-rate investment vehicles U.S. Bancorp Depository Shares (USB-PS) and Invesco Preferred ETF (PGX) after rates soared to a 15-year high and ahead of the recent interest rate plunge. The timing looks great so far. It’s also a great time for the recently upgraded portfolio utility stocks Brookfield Infrastructure Partners (BIP), NextEra Energy (NEE), and Excel Energy (XEL).

Those stocks got creamed in the last selloff as soaring interest rates made fixed-rate alternatives more attractive. But the selling got way overdone and interest rates are likely to continue falling as the economy sours. The overall market may not be out of the woods yet, but the bottom is probably already in for these recession-resistant utilities.

Meanwhile, you’re seeing just how fast the technology stocks can move higher when the environment improves, and it will eventually.

High Yield Tier

Enterprise Product Partners (EPD – yield 7.6%) – This midstream energy partnership doesn’t seem to do anything. It just pays a massive yield and slowly trends higher in price. In a terrible year. EPD has returned 22% YTD. Earnings last quarter were fantastic as oil and gas volumes continue at record levels. Volumes should stay very solid even in a recession under the current global supply/demand dynamic and Enterprise’s contracts have automatic inflation adjustments. EPD should be an ideal holding in the quarters ahead. (This security generates a K1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.7%) – This midstream energy stock has been quietly killing it. OKE has returned about 16% YTD in a lousy year for the market. But it has been somewhat volatile after a blowout year in 2021. OKE is still more than 13% below the 52-week high but has been on the move lately. It’s up a whopping 30% since late September. And the future looks bright. Earnings are solid, and demand for natural gas remains strong and will likely remain so even in recession. BUY

Realty Income (O – yield 4.6%) – Earnings for this legendary income REIT surpassed estimates as it declared its 100^th consecutive quarterly dividend increase. Revenue soared 80% as results continue to reflect the merger with VEREIT that was completed a year ago. Normalized funds from operations per share rose 9% compared to last year’s third quarter and 7.7% from the last quarter. Realty’s typical tenants of drug stores, convenience stores and supermarkets enabled it to continue raising the dividend through the pandemic and should prove resilient in this recession. BUY

The Williams Companies, Inc. (WMB – yield 5.0%) – This midstream energy company has quietly been on fire. It’s up almost 40% from the low of late September and is within about 10% of the 52-week high. Williams reported earnings that topped estimates with earnings growth of 15% over last year’s quarter. A big reason for the strong earnings is resilient natural gas demand, something that is likely to endure through the recession based on shortages overseas. The stock is getting a bump and the good times should continue. BUY

Medical Properties Trust, Inc. (MPW – yield 9.2%) – This unloved hospital property REIT has had a nice move higher this past month. It’s up 27% from the October low. Of course, MPW is still down around 40% YTD, but it may have bottomed out. Earnings grew at about 30% for the quarter and the stock has risen about 7% over the past week. Results strongly indicate that the stratospheric dividend should be safe. The fundamentals support a much higher price and now momentum is there too. HOLD

Dividend Growth Tier

AbbVie (ABBV – yield 3.9%) – Healthcare is a great place to be right now as a recession looms in the near future. People get sick and take medicine regardless of the economy and the sector is among the best to own when the economy goes south. And ABBV consistently significantly outperforms the sector. ABBV has a positive return YTD, which isn’t too shabby in this crummy market. Of course, ABBV is still way off the high of last spring. ABBV could be breaking out as it hit the highest level since June after trending higher since August. HOLD

Broadcom Inc. (AVGO – yield 3.2%) – What a difference a couple of weeks can make. AVGO is up over 18% since early this month and 26% from the October low. The cooler inflation numbers unleashed a major rally in the technology sector. I’m not sure we’re out of the woods yet. But AVGO just gave you a preview of how fast it can move higher when the environment for the sector improves, and it will. This stock has been a bummer all year, but it will make up for lost time eventually and prove well worth the wait. HOLD

Brookfield Infrastructure Partners (BIP – yield 3.8%) – This bankable infrastructure partnership got ridiculously oversold when the market had a conniption over rising interest rates. But interest rates likely topped out ahead of a likely recession, and BIP has come roaring back. It’s up 18% from the October low already and I believe it has a lot further to go. This stock is made to be a gem during recession, inflation and a crummy market. Earnings are recession-proof. Inflation adjustments are built into the contracts. And it pays a great dividend. (This security generates a K1 form at tax time). BUY

Eli Lilly and Company (LLY – yield 1.1%) – The superstar big pharma company stock hasn’t benefitted from the recent market rally. It didn’t need to. LLY was already making new all-time highs when the market was still going to Hell in a handbasket. I still don’t trust this market. But I trust LLY to make another new high in the weeks ahead. Its diabetes drug Mounjaro is pending fast-track approval for weight loss. Studies so far have made the drug one of the most promising ever seen in a country where nearly 2 in 5 adults are considered obese. There’s also the Alzheimer’s drug that could be huge. HOLD

Intel Corporation (INTC – yield 5.1%) – This stock may well have bottomed out. Earnings were terrible again but that’s probably already baked into the price. The near term is ugly, but the dividend is safe, and the future could be very bright. INTC currently sells near book value. It also has significant promise in its growing foundry business that should be further aided by government subsidies. The long term is promising. It’s the short term that has been the problem. But INTC has quietly moved nearly 30% higher off the low of last month. HOLD

Qualcomm Inc. (QCOM – yield 2.6%) – Dang. QCOM moved more than 20% higher in less than two weeks. As I mentioned with AVGO, the cooler inflation numbers ignited a big rally in tech. Even if the worst still isn’t over for the sector, QCOM is showing you how fast it can move higher when the tech sector environment improves, and it surely will. Remember, the market anticipates. Qualcomm just announced a profit slowdown for the quarters ahead. But the market has been pricing that in all year, even when current profits were still booming. Now the market is starting to look toward the recovery. HOLD

Visa Inc. (V – yield 0.9%) – Visa reported earnings that once again killed it. Revenue spiked 22% and earnings were up 27% from last year’s quarter. The payments processing giant continues to benefit from the end of covid restrictions despite the slower economy. V got a nice bump after earnings. Even though the situation is murkier going forward as the U.S. and global economies continue to deteriorate, the recent market rally is more evidence that V quickly benefits when the market turns. It’s been on a roll that hopefully lasts a while longer. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 2.0%) – The alternative energy utility continues to rebound since being upgraded to a BUY. Even if the overall market hits a new bottom again, I believe NEE has already seen the bottom and will continue to recover. The interest rate spike that sent utility stocks reeling is already reversing as we head toward recession. NEE is already up over 25% from the October low. And it’s probably not done yet. BUY

Xcel Energy (XEL – yield 3.2%) – This clean energy utility was oversold in the September market plunge. It was upgraded to BUY because it was timely after a huge selloff that is proving to have been unjustified. Interest rates have been plunging and XEL has rallied strongly off the recent low. The near term is shaping up well and the longer-term prognosis is also excellent. It should also benefit from new legislation from Washington that will reduce costs of its considerable clean energy production. The stock should be solid in a recession. BUY

USB Depository Shares (USB-PS – yield 5.5%) – The high-paying, investment-grade preferred stock is certainly working so far. It was added to the portfolio after interest rates spiked to a 15-year high. Rates have since been plunging as inflation cools and we barrel toward recession. Hopefully, you got the stock last month when the yield was over 6%. BUY

1) Please tell me about a time you made money on one of my trades – how much? How fast? What did you do with your profits?

2) How would you describe Cabot Dividend Investor to a friend?
You can simply send your response by email to CDI@cabotwealth.com. We’ll share interesting responses, anonymously, with you on the website.