Growth Worries
The second quarter ends today. GDP growth is forecasted to be 8.6% for the quarter, one of the best on record. Earnings for the S&P 500 is expected to grow over 60% over last year’s second quarter. Economic growth for the third and fourth quarter is expected to be very strong as well.
Yet, the market is worried about growth. What gives?
The ten-year Treasury rate has been declining. After soaring from under 1% at the beginning of the year to 1.75% at the end of March, the rate has fallen steadily since to the current 1.44%. The economy is booming, and inflation is everywhere, but the ten-year rate is falling.
The falling rate indicates investor concern about future growth. Sure, the open-up economy will boom and make up for lost time. But then what? Before long there will come a time when GDP growth normalizes. The Fed will also have to pull back its expansionary policies. The trillions in stimulus spigot will turn off. Then, the economy will have to grow the old-fashioned way.
Sure, things are great now. But how much of the post-pandemic euphoria is already priced into the market after a 90% move higher from the bottom? Investors are starting to worry about what happens next.
This has been an unprecedented market with the closing of the economy last year and the opening up this year. The market has been terrific for over a year. Investors might be starting to sober up. They may still be a little drunk, but they’ll only get more sober going forward.
The market is starting to grapple with life after the party. The easy gains are probably behind us. Looking ahead, it is likely to be more of a stock picker’s market. That’s okay. The well-chosen stocks in this portfolio, along with the high dividends, will likely boost our relative performance in a normalized environment.
High Yield Tier
AGNC Investment Corp. (AGNC – yield 8.4%) – There were two main reasons to buy this mortgage REIT: the booming economy and the steepening yield curve. The steepening yield curve part has come into question and the stock has fallen. But I still like AGNC for two reasons. One is that the strong economy should make the huge dividend quite secure and make the stock at least stable and high yielding from here. And two, the yield curve may indeed still steepen despite the recent consensus thinking. BUY
Enterprise Product Partners (EPD – yield 7.4%) – The midstream energy partnership pulled back after being unjustifiably hit in sympathy with the rest of the energy sector. Enterprise is not dependent on commodity prices but rather the volumes of oil and gas moving around the countries and through its pipelines. Volumes should be healthy in the full recovery. Meanwhile, the stock sells well below the pre-pandemic price with higher and growing earnings and a high and safe yield. BUY
ONEOK Inc. (OKE – yield 6.7%) – This fellow midstream energy company OKE has already gained back almost all of what it lost a couple of weeks ago. It’s an impressive recovery from a stock that looks like it wants to go higher. And why shouldn’t it? It sells at a compelling value with a high and safe dividend. And the stock is on an uptrend with momentum. BUY
Realty Income (O – yield 4.2%) – The legendary income REIT has pulled back from the post-pandemic high made earlier this month. But making new highs and then pulling back is a normal pattern for this stock. And it’s still well below the pre-pandemic high with higher earnings. The stock should be coveted by investors in the post-pandemic market while fundamentals improve in the full recovery. BUY
STAG Industrial (STAG – yield 3.8%) – This more cyclical industrial REIT didn’t really sell down with the sector and remains near the all-time high. Its industrial properties and e-commerce warehouses remain in high demand. And that demand is likely to grow stronger in the full recovery. Meanwhile, the industrial subsector is still highly fragmented with plenty of opportunities for STAG to grow. It’s a great company. Let’s see how far it runs. HOLD
Verizon Communications (VZ – yield 4.5%) – The stock price continues to not go anywhere. Aside from the yield, I still like VZ for two main reasons. One is that VZ is a strong down-market stock that is nice to have as the market gets increasingly uncertain. And two, the company benefits from 5G, which should become a bigger story in the market as things normalize. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 4.6%) – The health care sector has underperformed the overall market so far this year. A big part of that underperformance is the fact that there have been so many other things competing for investors’ attention in the pandemic and recovery. I expect better things from the sector as the market normalizes in the quarters ahead. Meanwhile, ABBV is still hanging tough in a higher range, and much will depend on news of its drug pipeline in the near term. BUY
Broadcom Inc. (AVGO – yield 3.0%) – This crucial infrastructure technology company has too much going for it as technology proliferates and 5G rolls out not to get a move on at some point in the near future. It’s possible the technology sector is coming alive already. The Nasdaq finally eclipsed the February high this week and AVGO has moved more than 12% higher since the middle of May. BUY
Brookfield Infrastructure Partners (BIP – yield 3.7%) – The infrastructure partnership just keeps trending higher, but at a pace that’s so slow you can barely notice. It has been trending ever-so-slowly higher for the whole year. That’s okay. It pays a solid dividend with a price that trends higher in an uncertain market. It also has rising earnings as recent acquisitions boost the bottom line. And infrastructure may become a much more popular subsector if Congress passes any kind of infrastructure bill. BUY
Chevron Corp. (CVX – yield 5.0%) – The energy sector, along with CVX, has pulled back since the Fed announcement was perceived as more hawkish on inflation. But crude oil prices didn’t get the memo and keep climbing. Oil prices are on the verge of eclipsing the 5-year high at 73.44 per barrel. That’s good for Chevron. CVX has been going sideways since the huge surge at the beginning of the year but hasn’t pulled back in a meaningful way. I expect another run in the stock before the end of the year. HOLD
Digital Realty Trust (DLR – yield 3.0%) – This data center REIT was minding its own business making new highs when it got sucked into an unfounded pullback in REITs. It’s been slowly clawing back since. This is normal bouncy behavior for DLR. I expect it to continue trending higher. BUY
Eli Lilly and Company (LLY – yield 1.5%) – LLY has a fantastic pipeline. The recent Biogen (BIIB) approval stoked optimism about Lilly’s pending Alzheimer’s treatment. Lilly has a better drug that could be a potential mega blockbuster. The stock has reacted very positively to the news. While the sector has floundered, LLY is up 35% YTD. I normally don’t put much stock in any one drug, but the odds seem to be very good on approval for this drug. HOLD
KKR & Co. Inc. (KKR – yield 1.0%) – The souring of the yield curve trade after the Fed announcement didn’t bother this alternative investment wealth manager stock at all. KKR has continued to move higher and recently made a new all-time high. This financial company isn’t dependent on yield spreads but rather the growing popularity of alternative investments as institutions diversify away from the stock and bond markets. It’s a growing business and KKR is the best. BUY
Qualcomm Inc. (QCOM – yield 1.9%) – The long consolidation period since the February high may be coming to an end. QCOM just came within a whisker of the April high. While there still isn’t enough evidence that the stock is off to the races, this is how it would look if it were. The company is enjoying a revenue and earnings bonanza as the royalties from the 5G smartphone chips roll in. And QCOM still sells at a cheap valuation. HOLD
U.S. Bancorp (USB – yield 3.0%) – This best-in-class regional bank stock got knocked back by the recent yield curve trade. But it’s not out by any means. Profitability will surely benefit from higher loan volume in a booming economy. And long-term rates may trend higher going forward as well. The bank should have some very strong quarters ahead. BUY
Valero Energy Corp. (VLO – yield 4.8%) – The economy is booming, and gasoline and diesel prices are soaring amidst the higher demand. That’s all good for refining margins. VLO was merrily making new highs until the Fed announcement. The stock took a hit on some of the rough energy sector days. But I still think this stock has a lot more in the tank over the rest of the year. 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%) – After falling during the pandemic, this preferred stock ETF has recovered and is back near the pre-pandemic high. 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. HOLD
NextEra Energy (NEE – yield 2.1%) – This former superstar has been floundering for months. But I like the way alternative energy is set up going forward. Amidst the pandemic and boom in technology followed by the cyclical rally, investors forgot about this fast-growing subsector. But, as things normalize after the pandemic, clean energy will be a hot trade again, and this conservative play will be right there. BUY
Xcel Energy (XEL – yield 2.7%) – This smaller and lesser-known alternative energy utility stock is retreating from the recent high it made last month, down almost 10%. That’s not unusual behavior for XEL. It bounces around a lot on a longer-term uptrend. Alternative energy has been out of favor. But that shouldn’t last long. It’s in the spotlight in the new Administration. When the sector gets moving again it should be a big tailwind for XEL. BUY
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