Ugly Markets Make a Better Future
The results are in.
Last year was the worst year for the market since 2008 and December was the worst month for stocks since 1931. For the year, the S&P 500 returned -6.24%. The index fell 9% in December alone. As of the market close on Monday, the S&P is down 14.5% from the high.
But that’s in the past. What matters is where we go from here. This selloff is the worst in seven years. Market corrections in that period have seen rapid bounce backs. This market however has been floundering since early October and the carnage has gotten much worse over the last month and week. Have we seen the bottom or is there more pain ahead?
My view is that it is likely that we have not yet seen the bottom but the market will recover nicely into the first part of this year. The economy is still way too strong for a recession in the foreseeable future. The market is oversold and once the panic subsides we should rally. But things may get worse before they get better.
As investors, it is crucial that we put down markets in perspective. While they offer short term peril, they also offer long term opportunity. Historically, the market trends higher and down markets have been the best times to buy. Sure, you might lose money on paper in the short term. But you can be richer for it over the long run.
I’m sure you’re getting barraged with negative headlines. This always happens. When the market goes down 10%, they say it’s going down 20%. When it goes down 20%, they say we’re on the way to down 40%. Even when the market crashes 40% or more, like during the financial crisis, they’ll say it is just the first shoe to drop.
Negative news sells. But let me give you some facts you don’t see in teaser headlines that put things in better perspective.
- Since 1926, calendar year returns following negative return years have averaged 12.4%.
- Following a 10% to 20% correction, returns over the next 12 months have averaged 34%.
- After a bear market (down 20% or more) the following 12 months have returned an average of 47%.
Down markets are a fact of life in investing. Don’t fear them. Embrace them. They offer short term angst and long term bliss for those bold enough to take advantage. Plus, they scare investors out of the market and create opportunity for us.
High Yield Tier
BUY – Community Health Trust (CHCT $29 – yield 5.6%) – Healthcare was the best performing sector in the market in a pretty dismal 2018, and one of the strongest sectors in the recent tumult. There’s a good reason. The industry offers growth as the population ages and defense as people spend on healthcare in any economy. CHCT is also a REIT offering a strong dividend in a market pressed for returns. This is a solid stock to own in this market.
HOLD – General Motors (GM $33 – 4.5%) – GM is a great company and an undervalued stock. The financials look great. It pays a strong and well supported dividend. It sells at a microscopic PE ratio of less than 6 times earnings. The sum of its parts should add up to a better stock price. But investors haven’t shown the stock much love, and probably won’t for the rest of this cycle. As well, the stock is at the mercy of trade news and the global economy. Like many stocks it got too beat up in the recent market and should bounce back nicely as the market recovers.
HOLD – STAG Industrial (STAG $25 – 5.7%) – This is a solid industrial REIT that has outperformed other REITs in recent years. Industrial properties are in short supply and demand is strong right now. But as fears of a slowing economy have grown, this more cyclical industrial subsector has been underperforming its peers, albeit only slightly. STAG is still a keeper for now but I may look to sell it down the road as we get closer to a recession.
Dividend Growth Tier
BUY – Altria (MO $49 - 6.5%) – This is a different company than it was months ago. Altria has generated about 89% of its revenue from smokable products, mostly cigarettes. Cigarette volume is about half of what it was in 2009 as smoking continues to decline. But Altria managed to grow earnings at about 9% per year during the period with its ability to raise prices on its dominant Marlboro brand. But volumes have been slipping more lately as more smokers move to E-cigarettes. In reaction, Altria just invested $14.6 billion in a 45% stake in cannabis company Cronos (CRON) and a 35% stake in E-cigarette powerhouse JUUL. It bought more growth to compensate for the dwindling smoking market. No one knows how the new move will work, and it will take time before they do. However, at a five year low with a monster yield, MO looks like a great stock to own in this market.
HOLD – American Express (AXP $95 – yield 1.6%) – The stock has had a strong 7% jump over the past week. It is one of the very best financial companies in a market that has hated financial companies. AXP is a hold on the basis of my current belief that the market will recover and trend higher in the first part of this year. Such a recovery should prompt a nice bounce in AXP.
HOLD – CME Group (CME $188 – yield 1.5%) – As a company that runs exchanges trading derivatives, CME is a different animal. Market volatility is great for business. While the current tumult wreaks havoc with the market, it also rings the register for CME. The stock is actually higher over the last three months and only slightly lower in the worst December in the market since 1931. It’s a wonderful stock to own these days.
Safe Income Tier
BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ $21 – yield 2.0%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL $21 – yield 2.6%)
Not much to say here. The short term corporate bond ETFs are a safe port in a stormy market. Since the funds are short term, there isn’t even danger should interest rates start moving higher. This is market that makes safe and boring beautiful and precious.
BUY – Consolidated Edison (ED $76 – yield 3.8%) – ED didn’t have a good bounce last week. It underperformed the Utilities index and the overall market and actually moved lower. There was an explosion at one of its transformers in NYC. It seems to be a minor problem that shouldn’t materially affect operations or profits. Hopefully, this was the only reason for the underperformance but I will be keeping an eye on this one. Utilities are still a great place to be and ED isn’t overpriced.
HOLD – Ecolab (ECL $147 – yield 1.3%) – This water treatment and specialty chemical company has outperformed both its peers and the market in the recent selloff. It was a rock-solid hold until the market started beating up on anything and everything in the past month. It’s still a hold but if it doesn’t start playing better defense I will reconsider.
HOLD – Hormel Foods (HRL $43 – yield 1.9%) – This food company has consistently outperformed the market through the ugliness. It’s actually up over 7% over the last three months while the market is down over 15%. That’s 22% outperformance in a down market. That’s what you want this stock to do. It’s performing as advertised. It’s not a buy here because this market has recently turned on safe stocks. We’ll see what happens from here.
HOLD – Invesco Preferred ETF (PGX $13 – yield 6.1%) – As I mentioned last week, the returns for this ETF have been very disappointing. Preferred stocks are an asset class separate from common stocks and bonds. It should hold up well in a down market and also in the face of rising interest rates, but it isn’t performing as advertised. It’s been solid in recent weeks so I will hold on for now. But this ETF is on double secret probation.
HOLD – McCormick & Co (MKC $139 - yield 1.6%) – This food company has similar market dynamics as its peer HRL, but I believe this is a better company and a better stock. It had been everything a defensive stock should be and more. In 2018, while all the indexes were negative for the year, MKC posted a 39% return. Unfortunately, the market has turned on outperformers like this over the past month, so I’m reducing the rating to a hold.
BUY – NextEra Energy (NEE $174 – yield 2.6%) – Much of what applies to the utility sector in general applies to NEE. Utilities and Healthcare are the only market sectors with positive returns for 2018. And Utilities are the best performing sector over the past tumultuous month. As such, NEE is a rare stock that is closer to its 52-week high than its low. It isn’t cheap and the past week has been unkind to utilities and NEE. We’ll see how the market treats this sector going forward, but for now I’m sticking with utilities.
BUY – UnitedHealth Group (UNH $249 – yield 1.5%) – This health insurance giant is in the right place at the right time. Health care should continue to be a market darling in any market because the sector offers both growth and defense. But UNH is a special case in that it has more regulatory risk than most of companies in the sector. Fortunately, much of that risk has been negated by the Democrats winning the House of Representatives. There is now virtually zero risk of any kind of repeal of Obamacare.
HOLD – Xcel Energy (XEL $49 – yield 3.1%) – This is a solid REIT that has outperformed in this troubled market. Like NEE, Xcel is also a leader in alternative energy. But I like NEE better, as well as ED. By all means hold it if you already own it but if you want to put new money to work I’d rather steer you toward NEE and ED at this point.
