The Bull Market Digests a Trade War
The market was on fire until recently. The S&P 500 is already up over 13% for the year and it’s only May. After the breakdown of trade negotiations with China and the escalation of tariffs, the market had a few ugly trading days, but now, it looks like we’re back in the saddle again.
The market is absorbing two harsh realities; it won’t get a trade deal that was already partially priced in and the trade situation took a turn for the worse. After the initial panic, investors are realizing that the new tariffs will do very little tangible damage to the overall economy. And trade negotiations will continue with renewed urgency.
The bad trade news does change the math in a couple of ways. For one, escalating trade frictions with China will be a drag on the already sputtering global economy. And a lousy global economy will inevitably be a drag on ours. It also changes investor mentality. Every market is a tug-of-war between good news and bad news. The trade war throws a weight on the bad news side. While the news doesn’t tip critical mass to the dark side, it does make the scale wobble for a while.
Several major investment banks are expressing optimism about the prospects of a trade deal down the road. Admittedly, I’m not a China expert and these people know a lot more than I do. But I’m skeptical.
I don’t see this administration going back to sending China $400 billion a year while they rip off our technology and build up a military to threaten us. And I don’t see China surrendering a big part of their geopolitical advantage to lily-livered American politicians with an unblemished track record of running for cover the second poll numbers move the wrong way. The Chinese tend to take the long view, and I don’t see them giving in until the next election at least.
While the recently increased tariffs on $200 billion of Chinese goods and the additional tariffs on $60 billion of American goods aren’t that big of a deal, the threatened tariffs on an additional $300 billion of Chinese goods and an all-out trade war would be a significant drag on the market. I don’t see the two sides anywhere near a deal. I think they’re digging in.
Of course, I could be wrong. I hope I am. But as a conservative dividend investor, I’m going to go ahead and assume things will get worse, and expose myself to being pleasantly surprised if they don’t. The bottom line is that I’ll be more conservative than I was a couple of weeks ago. I’m more bullish on the safe stocks and less so on the more cyclical plays.
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP 42 – yield 4.9%) – Never underestimate the staying power of a defensive, non cyclical business model and a high dividend payout. In the past tumultuous week the stock moved higher. Earnings were good a couple of weeks ago and the global infrastructure company is poised to grow earnings at a much-better-than-the-market clip over the course of the year. The chart looks good and the stock could break above the January high of about $44 in the near future.
HOLD – Community Health Trust (CHCT 37 – yield 4.5%) – The small healthcare REIT has shown solid performance in down markets. True, it’s fairly valued at the current level and near the 52-week high after a great run, up 44% for the past year and 29% year-to-date. But the stock may find new love as market volatility has spiked higher. There is usually a reallocation to safer and higher dividend payers after a jolt like we just had.
BUY – Enterprise Product Partners (EPD 29 – yield 5.9%) –The energy infrastructure company began investing heavily to accommodate the energy boom in 2017 and those investments are now coming online and boosting profits. DCF was buoyed by $1.7 billion in new projects that came into service in the first quarter. There is another $3,5 billion worth that should be in service before year’s end that should boost earnings for the year. I’m still looking for a breakout above the $30 level. But the stock looks good in both the near and intermediate terms.
HOLD – STAG Industrial (STAG 29 – 4.8%) – On the one hand this industrial REIT looks pricey or at least fairly valued. But considering the increase in needed industrial space with the explosion of Amazon and the like combined with STAG’s track record of successful acquisitions, it has the growth to support it. In the first quarter revenue was up 15%, from the year ago quarter, and adjusted funds from operations soared 21%. It’s a good stock for this market and it can go higher.
Dividend Growth Tier
BUY – AbbVie (ABBV 79 – 5.3%) – This is one of the best (possibly the very best) large pharmaceutical companies in a sector soft spot. It’s a great time to get in on the cheap and collect a 5.4% yield while you wait. The market is waiting for proof that its newly launched drugs and pipeline can provide revenue to overcome the slippage in sales of its top selling Humira drug. I’m confident that will happen sooner or later. In the meantime, it should be a solid down market stock because it’s already had the stuffing knocked out of it, down 37% from its January 2018 high.
BUY – Altria (MO 52 – 5.6%) – In many ways this story mirrors AbbVie’s. Its core business, cigarettes, is shrinking and the company is seeking to replace the falling revenue with new products, E-cigarettes and marijuana. The market is waiting to see proof that Altria can pull this off and until that happens the stock isn’t getting much love from the market. As I’ve mentioned, I believe the company will pull it off. In the meantime, it is a highly undervalued stock paying you about 6% to wait around a little bit.
BUY – American Express (AXP 117 – yield 1.4%) – Amex held up well this week. It may seem like a cyclical stock that should take a hit on the China trade stuff. But it is unlikely to be affected directly by the tariffs. The main risk to the credit card company is a global economic slowdown. However, the recently announced tariffs are unlikely to materially affect global growth. It might be a different story if the other $300 billion in Chinese goods are targeted for tariffs. But for now Amex should be fine.
Rating change “BUY” to “HOLD”
HOLD – Intel Corporation (INTC 45 – yield 2.2%) – The news has been very bad. This is a long-term winner facing a hostile external environment in the short term. An earnings disappointment is one thing but the China situation is bad. Technology is the sector most adversely affected by the China trade war and Intel derives an estimated 25% of revenues from China. The tangible effect of recently increased sanctions has been overblown and there is a good possibility of a further bounce back from here. However, I will not tolerate things turning south anymore and if it goes the other way look for a special report and possible sell in the days ahead.
Safe Income Tier
BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.2%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.7%)
There is nothing to say about these safe short-term bond ETFs. And that’s the beauty of them. They just keep rolling on at a steady price paying interest. When the market booms these ETFs seem like a waste and dead money but the recent volatility underscores why these safe havens make a lot of sense in a portfolio.
HOLD – Consolidated Edison (ED 86 – yield 3.5%) – This is a safe and boring utility with some good momentum. In a go-go market it can appear to be holding you back. But the recent volatility illustrates just why this is a welcome portfolio holding. Utility stocks have been up over the past week. And regardless of what happens going forward, investors have been given a potent reminder of why dividend-paying utility stocks are good to own. In short, the China stuff probably just increased the upside for ED in the near term.
BUY – Invesco Preferred ETF (PGX 15 – yield 5.6%) – The high yield and lack of correlation to the stock and bond markets make this a nice portfolio holding and income generator. I’ll take a juicy yield and monthly payments with a stable price any day of the week. As well, the recent market turbulence could give investors a renewed appreciation for an investment like this.
HOLD – McCormick & Co (MKC 155 – yield 1.5%) – This was another positive week for MKC. The stock is up 22% in the last three months. Since being added to the portfolio last summer this spice maker has returned over 30%, way better than the overall market and with less volatility. The stock already had good momentum and the renewed volatility should be a new tailwind for the stock. When things get hairy, food stocks are a nice place to be. And this is a good one.
HOLD – NextEra Energy (NEE 195 – yield 2.6%) – This is a good environment for utilities, and NEE is the sexiest one of the lot. Not only does it generate steady, defensive and predictable returns and income; but it also offers a higher level of earnings growth than its peers with its magnificent alternative energy business. Hopefully the stock will get a boost in the changing market dynamic. And unlike most utilities, NEE doesn’t trade at an exorbitant valuation.
HOLD – Xcel Energy (XEL 58 – yield 2.9%) – Sure, the stock is expensive here, but for good reason. This is one of the very best utilities on the market. It has a growing alternative energy business and is a darling of the regulators. It also has strong momentum. Sprinkle in a dose of geopolitical tension and you have great stock to be invested in right now.
