The Market Recovers - for Now
Okay, the market got a nice bounce off the Christmas Eve lows. It’s up about 10% since then. But the bounce back is leveling off. Now what?
What to expect depends on the time frame. There’s the short, intermediate and long term. All three have a different prognosis. Let’s start with the short term. I consider the short term to be the next six months or so. This is the most unpredictable time frame. Anything can happen.
The market indexes plunged about 20% from the September highs to the low point on Christmas Eve. There is concern about the Fed raising rates, the slowing global economy and trade. But the severity of the selloff indicated a recession in the next six months to a year, although that appears unlikely given the strength of the economy.
Realizing there is no imminent recession, the market is bouncing back. I believe, at this point, that it is likely that the market will continue to rally back in the first half of the year, recovering from a selloff that got overdone. However, there are no guarantees, as there are many uncertainties that could spool investors. We might not be out of trouble yet.
That said, there is a good chance that the market will be higher than it is now by the middle of the year. That brings us to the intermediate term (about the next two years). The problem is that a market recovery here wrecks the outlook for the intermediate time frame. Let me explain.
Part of me hopes that market remains under the gun and a recession does come later this year. That way we would get it over with, and before the end of this year we could be at the beginning of the next bull market. The market may well recover at this point because a recession isn’t close enough, but the specter of the next recession still lingers for the next year or two.
A recovery here means that we only recover to the late stage economic cycle with a recession and more severe selloff looming in the not-too-distant future. That should temper investor enthusiasm.
The long term should be fine. The Dow Jones was under 7000 a decade ago, now it’s over 24,000. The Dow was 800 when I graduated High School, now it’s over 24,000. When we get past the next recession I believe it will be off to the races again.
That’s my current prognosis. If the market continues to recover here, it will be in a guarded and cautious state for another year or two. Beyond that, there will be fantastic opportunities to get aggressive. But, for now, I will remain cautious but not fearful.
High Yield Tier
BUY – Community Health Trust (CHCT $31 – yield 5.3%) – This healthcare properties REIT lagged the overall market for the past week, but it has been a solid outperformer up until now. The more cyclical names have been the top performers as this market bounces back on the realization that there is no recession coming in the near future. It’s still a solid defensive stock to own as the market remains dicey.
HOLD – General Motors (GM $38 – 4.0%) – GM had an absolutely fantastic week. The stock soared 7.05% on Friday and is up 11% so far this month. The company raised its 2018 earnings guidance and also forecasted strong growth for 2019. The stock is in conflict. The company is doing great but the external environment for autos stinks. GM continues to hone its rising profitability with excellent cars and plunging costs. But it has to contend with trade issues, slowing global growth and a rapidly aging economic cycle. It’s winning this week and will rise further if news on any of those three things gets better.
HOLD – STAG Industrial (STAG $26 – 5.4%) – This is a solid industrial REIT that has outperformed other REITs in recent years. Demand for industrial real estate has been off the charts. The fact that industrial properties tend to be more cyclical hurt it a little in the downturn but is serving it well in the rebound. Stay tuned.
Dividend Growth Tier
BUY – Altria (MO $48 - $6.7%) – Altria isn’t getting much respect from this market. It’s down a buck for the week. The good news is that the stock is so beaten down that it shouldn’t have a lot of downside even if the market turns south again. But investors are viewing the recent purchases in the cannabis and E-cigarette markets as a desperation move that might not be good enough to offset accelerating cigarette volume erosion. I disagree. There’s a lot of growth potential here with a company that has spent many decades proving that it is unwise to bet against it.
HOLD – American Express (AXP $98 – yield 1.4%) – Business is great. The stock is just a victim of the recent market that’s hated everything financial, but there may be an upside catalyst on the way. The company announces fourth quarter earnings on Thursday. Results should be good. We’ll see if the market approves.
HOLD – CME Group (CME $182 – 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 for 2018. But volatility is waning and so is the relative outperformance of this stock. It’s still worth holding for now as the waters could get rough again and fourth quarter earnings results should be sweet.
Safe Income Tier
BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ $21 – yield 1.9%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL $21 – yield 2.4%)
These short term corporate bond ETFs are a safe hiding place. It’s a good place to diversify out stocks and keep money safe while earning a decent yield. The market may be very uncertain for a while.
HOLD – Consolidated Edison (ED $76 – yield 3.8%) – I lowered the rating on ED last week from a BUY to a HOLD because of consistent relative underperformance. Earnings growth is expected to be flat this year. There seems to be little reason to hold it now except for its solid dividend and membership in a defensive group. If I had more confidence in the market I would probably dump it. But I’m holding for now.
HOLD – Ecolab (ECL $150 – yield 1.2%) – 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 $43 – yield 1.9%) – The stock’s had a good week, up 2.5% compared to a 1% move for the overall market. I’ve recently mentioned the stock’s solid performance for 2018 and throughout the downturn. But I didn’t mention that its sector, consumer staples, had a lousy year. Hormel was a standout in a defensive sector that had disappointing performance. The outperformance continues as its business model is proving extra resilient.
HOLD – Invesco Preferred ETF (PGX $14 – yield 6.0%) – I like this ETF because it offers a high yield and diversification from both stocks and bonds. It has been a disappointing performer during the past year but it’s acting much better in the latest market rally. Investors may be taking another look at this high yielding and neglected asset class.
HOLD – McCormick & Co (MKC $141 - yield 1.6%) – Everything I said about Hormel applies to this stock as well, except that it didn’t just provide solid performance for 2018, it blew the market away with a 39% return for the year. It has been a spectacular holding in a difficult year. I don’t know how much gas is left in the tank for next year but I’ll hold it for now because of its defensive characteristics.
BUY – NextEra Energy (NEE $175 – yield 2.5%) – This great big utility gets it done. It has solid cash flow from its regulated business combined with stronger growth from its non-regulated side. The stock returned almost 20% in 2018 and isn’t that cheap here. It’s sells at a higher PE multiple than its peers, 21x verses 17x, but it’s worth the price. NEE is selling only very slightly above its average PE over the past five years, a period where it returned an average of over 17% per year.
BUY – UnitedHealth Group (UNH $257 – yield 1.4%) – The health insurance giant announced earnings yesterday and beat expectations on both revenue and profits. From the year ago period, earnings rose 27% and revenues were 12% higher. It’s fastest growing unit Optum, a health information technology and services firm, grew revenues 13%. The stock had not bounced back as much as the overall market in recent weeks but it’s picking up steam now. It was up 4.6% for the past week and 3.55% yesterday alone.
HOLD – Xcel Energy (XEL $50 – yield 2.9%) – As a midsized utility, the stock performed well in a tough 2018. The stock continues to outperform its peers in the utility sector index. While XEL is much closer to its 52-week high than low it still sells at a price/earnings multiple right around the average for the sector. Analysts expect around 6% earnings growth for 2019 which is very solid for a utility. The stock faces technical resistance around the $50.70 range, so it’s a hold for now.
