The Market Recovers - for Now
Don’t look now but the market is in rally mode and has been for a couple of weeks. It’s rocketed almost 10% since the Christmas Eve low. That’s a huge move in a short time.
I believe the recent selloff was overdone. The market was essentially pricing in a recession that is nowhere in sight. I always believed that the market would bounce back once the panic waned because the fundamental backdrop is still so strong. But beware—this market has a new habit of overdoing it.
Sure, this upward move is more justified than the downward spiral it entered in December. But investors are still easily frightened. It won’t take much to send investors running for the exits again. The trade negotiations could fall apart. We could get a bad economic report. Earnings season could start out badly. Any of those events could derail this mini-rally.
But even if the market has put in a near-term bottom, we are still near the end of the business cycle. While it looks like the market jumped the gun on the next recession this time, there is still a recession looming for next year or the year after. When the smoke finally clears and volatility wanes, we will still be staring at the specter of a more severe downturn and a recession in the not-too-distant future.
We might be in a cautious market for quite a while. Consequently, this advisory will continue to favor safer, more recession-resistant stocks and investments for the foreseeable future. This selloff may be over. There is a good chance the market will be strong again in the first half of this year. But the 2018 selloff may have been a warning bell of things to come rather than a false alarm.
This update features just one rating change. I’m changing the rating on New York City utility Consolidated Edison (ED) from BUY to HOLD because of lackluster relative performance.
High Yield Tier
BUY – Community Health Trust (CHCT 31 – yield 5.6%) – This REIT that owns healthcare properties has outperformed both the overall market and its peers by a significant market for the past month, three months, six months and year. In a tumultuous 2018, REITs were a good place to be and healthcare was even better. I like this stock ahead of an uncertain market and expect the outperformance to continue.
HOLD – General Motors (GM 35 – 4.5%) – GM is a great company and an undervalued stock, and it has a better chance of achieving its true potential in the next cycle. And has recovered nicely with the overall market over the past couple of weeks. Since I believe the market will trend higher over the next six months and the stock is still about 30% off its recent high, I’m still holding GM.
HOLD – STAG Industrial (STAG 26 – 5.8%) – 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. STAG avoids the more expensive top-tier properties in favor of second-tier ones that tend to be less expensive and can garner a higher return. 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%) – Altria didn’t participate in the recent market recovery and the price is where it was last week. The problem is that the stock was downgraded at Cowen and Company based on its expectation that cigarette volumes decline at about 8% per year over the next five years compared to 3.1% over the last five, primarily due to competition from E-cigarettes. Altria just invested $14.6 billion on a 45% stake in cannabis company CRON and a 35% stake in E-cigarette powerhouse Juul. It bought more growth to compensate for the dwindling smoking market. It will take time to see if it was enough growth. In the meantime, it pays a huge dividend and does not appear to have much downside in an uncertain market.
HOLD – American Express (AXP 99 – yield 1.6%) – The stock is up over 11% since the recent Christmas Eve low. Credit cards are a great industry when the economy is strong and American Express has a special high-end niche. Naturally, worries about a slower economy and possible recession are bad for the stock. That said, since I believe the market has overdone it regarding recession fears and is bouncing back from that, I will hold AXP for now.
HOLD – CME Group (CME 183 – yield 1.5%) – Market volatility is great for this business that runs exchanges trading derivatives. It held up well in the recent correction and had a better than 20% return in 2018. It’s a great rough weather stock that is still worth owning as the skies have not cleared. Should volatility wane in the weeks or months ahead I will look to take profits.
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, other than that 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 a market that makes safe and boring beautiful and precious.
Rating change (BUY to HOLD)
HOLD – Consolidated Edison (ED 76 – yield 3.8%) – I’m changing the rating on this NYC utility from BUY to HOLD. Con Ed has significantly underperformed its industry peers both over the past year and amid the more recent tumult. This was ED’s time to shine, and it flickered. It should still hold up if the market gets ugly again but I see little that will drive it higher from here.
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’s been weaker of late but it should still be a solid hold while the market is still crazy.
HOLD – Hormel Foods (HRL 42 – yield 1.9%) – This food company has consistently outperformed the market through the ugliness. It’s actually up 16% over the past year and 4.4% over the last three months. That’s solid outperformance in a down market. The outperformance has been less brilliant recently, so it’s still a hold for now.
HOLD – Invesco Preferred ETF (PGX 13 – yield 6.1%) – I like this ETF because it offers a high yield and diversification from both stocks and bonds. It has been a disappointing performer all year but it is acting much better in the latest market phase.
HOLD – McCormick & Co (MKC 139 - yield 1.6%) – In 2018, while all the indexes were negative for the year, this food company posted a 39% return. That is seriously coming through as a safe stock in a rough market! It’s cooled off a little lately but it should remain an outperformer as long as this market stays nasty.
BUY – NextEra Energy (NEE 174 – yield 2.6%) – Much of what applies to the utility sector in general applies to NEE. Utilities and Healthcare were the only market sectors with positive returns in 2018. As such, NEE is a rare stock that is closer to its 52-week high that its low. It isn’t cheap and the past week has been less kind 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 243 – yield 1.5%) – The largest U.S. health insurer will report fourth-quarter earnings next Tuesday. Analysts expect year-over-year earnings growth of 24.32% and revenue growth of 11.29%. Earnings are that high because of the tax cuts, which will subside next year. However, earnings have grown an average of 20% over the last five years and are expected to continue to grow 15.8% per year over the next five. This is a recession-resistant company that should be an ideal holding going forward.
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. 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 at this point.
