May 19, 2021

The Market Shows Weakness
The market’s relentless march ever higher is being interrupted. What’s going on?

The market sold off the first three days of last week and then recovered in the last two sessions. But it’s back to its old tricks again this week, as the indexes sold down the first two days and are lower so far today. It certainly isn’t a big deal yet. The S&P 500 is down just a little over 3% from the all-time high. But there is concern.

Investors are spoiled. The S&P 500 was up 85% from the low of last year and 30% since early November. The past couple of weeks have revealed a kink in the armor. Why is the market going down and is it a portent of things to come?

If you follow the financial media, it’s because of inflation. I’ll get to that in a minute. But the main reason is that stocks have gone higher at a fast pace for a long time. And that never lasts, at least not without a breather. If it wasn’t inflation, there would be some other reason.

But there is inflation. And a plethora of ugly consequences go with it. There are supply issues. There aren’t enough workers, or enough housing, or enough computer chips. Trillions in stimulus and a booming economy chasing too few goods is causing inflation. The April Consumer Price Index came out showing an annualized 10% inflation rate. That’s the highest in ages.

Limited supplies could hold back the economic recovery, which the market has already largely priced in. People would buy more houses if they could find them. Businesses would produce more if they could find workers. Then there’s the Fed.

Wall Street types always seem to care most about the Fed. The high inflation numbers raise the possibility that the Fed will have to get more aggressive in fighting inflation by raising interest rates and/or curtailing bond purchases. Those things could also slow down the recovery.

Of course, higher inflation may well be natural and temporary consequence from an economy that is suddenly burning hotter than it has in many decades. It goes with the territory. It could be a much bigger problem if inflation lingers. But that remains to be seen.

We’ll see how this shakes out. A more significant selloff may well present a buying opportunity ahead of booming economic growth in the quarters ahead.

High Yield Tier
AGNC Investment Corp. (AGNC – 7.8%) – This mortgage REIT has seemingly all forces working in its favor right now. The housing market and the economy are strong. Interest rates are trending higher. And dividend stocks stand to benefit as growth stocks are getting hurt from inflation news. AGNC has been in an uptrend for over a year that has steepened recently. I expect the good news to persist. BUY

Enterprise Product Partners (EPD – yield 7.5%) – The midstream energy partnership trends up so slowly it’s hard to notice. But it’s up over 20% YTD and it just made a new post-pandemic high. While midstream energy companies don’t benefit directly from higher oil and gas prices, volumes through the systems increase with energy demand amidst the full recovery. The stratospheric yield is safe, and the stock should continue to trend higher in the months ahead. It’s still a long way from the pre-pandemic high. BUY

ONEOK Inc. (OKE – yield 6.9%) – Just about everything I said about EPD is true of this midstream operator and newest addition to the portfolio, except it’s more volatile. OKE has returned over 45% YTD and 65% over the past year. I expect future months to be very good to midstream energy companies which also benefit from the booming economy but haven’t moved up as much as the overall energy sector yet. BUY

Realty Income (O – 4.3%) – Realty stock has pulled back over the past few weeks after breaking out of a sideways range it had been in for a year. Despite the action of the past couple of weeks, the move is technically very bullish for O. The REIT should benefit as the economy opens and it’s affected properties bounce back. It might also benefit as investors opt more toward dividends and defensive plays as the market gets choppy. BUY

STAG Industrial (STAG – 4.1%) – Much of what is true about O is also true for STAG, except STAG is more cyclical because of its industrial properties. First-quarter earnings came in above expectations. The industrial properties have a very favorable supply/demand dynamic and STAG also owns a lot of e-commerce warehouses that should have a bright future. HOLD

Verizon Communications (VZ – 4.4%) – Version stock is under pressure along with the rest of the telecom stocks after AT&T (T) announced a dividend cut after the spinoff of its entertainment companies. But VZ was purchased because it wasn’t nearly as involved in distracting content holdings as its peers and could focus on the 5G opportunity from wireless. Verizon also just sold Yahoo and AOL to be even more streamlined. The VZ dividend is safe, and the AT&T news proves why VZ is better. HOLD

Dividend Growth Tier
AbbVie (ABBV – 4.4%) – Earnings were strong, and the company raised guidance for 2021. Adjusted earnings per share grew 22% over last year’s quarter and the CEO said that the company is on the cusp of a dozen new approvals over the next two years, including five for this year. But AbbVie is under scrutiny as lawmakers have requested a federal inquiry into its pricing practices for it blockbuster Humira drug. The issue is probably responsible for the slight pullback in ABBV. It’s an old issue and I’m not sure it will develop into a problem for the stock. BUY

Rating change “HOLD” to “BUY”
Broadcom Inc. (AVGO – yield 3.3%) –
These are rough days for the technology sector as inflation worries are hurting growth stocks. And AVGO has been held back and dragged down by the overall sector. But the longer-term trajectory for the company is great. Over 90% of internet traffic uses its products, and 5G is coming. AVGO could bounce around for a while longer, but the longer term should be great. BUY

Brookfield Infrastructure Partners (BIP – yield 3.8%) – The infrastructure partnership trends very slowly higher. It’s up about 9% YTD, which is on par with the S&P. The returns haven’t been exciting, but the stock is stable and trending the right way. Earnings should get a nice boost from new assets coming online as well as a recovery in its transportation assets. Infrastructure should also be a popular subsector after the pandemic. BUY

Chevron Corp. (CVX – yield 4.8%) – The energy giant stock has been under some pressure this week. The energy sector is pulling back on fear that the Fed might have to get more aggressive to fight inflation. Higher rates and less bond buying could throw some cold water on the recovery and energy demand. As well, Warren Buffett reduced his company’s stake in CVX by half. But it’s speculation that the Fed will get more aggressive anytime soon and the continued recovery should lift the stock. HOLD

Digital Realty Trust (DLR – yield 3.1%) – Aside from the long-term advantage of being in a growth business (data center properties), there are a couple of things to like about DLR in the near term. One is that after going sideways for a long time the stock broke out to a new near-term high, which is positive from a technical perspective. The other is that it’s a fantastic stock to own in turbulent markets. It has a microscopic beta of just 0.11, meaning that it tends to move independently of the overall market. It’s good to have a stock like that in the portfolio, especially as things get a little dicey. BUY

Eli Lilly and Company (LLY - yield 1.8%) – LLY is a rare stock with upward momentum in the recent market. It’s up about 9% in the last three weeks. Healthcare stocks have outperformed the market over the last few months as investor appetites for more defensive stocks increased. The company has one of the best pipelines in the industry as the population ages at warp speed. HOLD

KKR & Co. Inc. (KKR – yield 1.0%) – The alternative investment wealth manager announced stellar earnings of 63% over last year’s quarter as its capital markets revenues more than doubled. It looks like this high-flying alternative investment wealth manager is finally taking a breather. It had been in a furious uptrend since late February. But it’s pulled back in the last couple of weeks as the market grapples with inflation issues. The stock may bounce around and consolidate for a while, but I expect the price to be nicely higher by the end of the year. BUY

Qualcomm Inc. (QCOM – yield 2.1%) – I still like this chipmaker for the rest of this year and longer term. The most recent earnings trounced expectations and grew revenue 52% and adjusted earnings 116% over last year’s quarter. But it’s been a rough market for technology. I don’t expect the trouble in the sector to last that much longer. For now, QCOM is a hold while the inflation situation shakes out as things could get uglier. But I think the stock is at a cheap price relative to where it will be by the end of the year. HOLD

Rating change “HOLD” to “BUY”
U.S. Bancorp (USB – 2.8%) –
You know the market is getting ugly when USB sells off. The stocks rise had been immune to the turbulence last week, but it’s pulling back today. But the prospects for the rest of the year look great ahead of a booming economy and likely rising interest rates. The stock got all the way back to the pre-pandemic high and may catch some resistance and consolidate around this level for a while. But it should move higher in the quarters ahead. BUY

Valero Energy Corp. (VLO yield 4.9%) – The refiner remains a high-leverage play on the recovery. It should basically exaggerate whatever the overall energy sector does. That’s been a good thing lately and VLO has returned 44% YTD. I still expect energy demand to boom in the months ahead and a full recovery must include increased demand for gasoline and diesel. HOLD

Safe Income Tier
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 1.8%) – This short-term bond fund is a safe port. While the market is promising for the rest of the year, there are still a lot of uncertainties out there. It’s nice to have something in the portfolio that you don’t have to worry about. That said, the bonds in this ETF mature at the end of this year. HOLD

Invesco Preferred ETF (PGX – yield 5.0%) – This preferred stock ETF is much less volatile than the stock market while providing a big yield. It also adds diversification as preferred stock performance is historically not correlated to the stock and bond markets. Since falling sharply in the worst of the bear market, the fund price has recovered to pre-pandemic levels and then leveled off. It should continue to be a solid holding from here, even with interest rates rising. HOLD

NextEra Energy (NEE – yield 2.0%) – The highly popular conservative alternative energy play stock had a nice move up from the recent lows but then pulled back again. It’s surprising that it isn’t showing more strength while the new Administration will likely shower it with goodies and prompt investors to focus more on clean energy in the future. I believe NEE will come back into the market graces again in the near future. BUY

Xcel Energy (XEL – yield 2.6%) – This smaller and lesser-known alternative energy utility seems to move before NEE. It floundered before NEE and has recovered sooner. Since early March, the stock has had a huge move and is up over 20%. That’s a big move in a short time for a utility. Investors are seeing the value ahead of what should be a fantastic environment for alternative energy companies. BUY