Focus on the Bigger Picture
Oh no! Just when the market seemed to be back on track it had a terrible day. After rallying 13.6% from the Christmas Eve low and regaining most of what it lost since the September high, the S&P 500 fell 1.42% on Tuesday. The problem was reportedly new concerns about economic growth.
The market was digesting some unflattering news from the Monday holiday. China announced that 2018 GDP growth was the slowest since 1990 and the IMF (International Monetary Fund) lowered its global growth forecast for 2019. Then there was a report that the White House canceled a trade negotiation meeting with the Chinese. It was all too much for the market and it sold off.
Let me dissect that news.
It’s all worthless nonsense. First, the Chinese economy has been slowing for seven years. It has to. The 10% per year growth rate was unsustainable. It will continue to slow and everybody knows it. Sure, it’s been struggling a little bit more of late, but that’s old news too. The fact that it eventually hit the lowest level since 1990 was inevitable. It just makes a good headline.
Second, it’s well known that the global economy has been slowing for more than six months. But the IMF was at the World Economic Forum in Davos and they had to say something. So they lowered the 2019 global growth forecast by one-fifth of a percent, as if they have any such ability to predict with such precision. Finally, the report that the White House canceled a trade meeting was apparently untrue.
This is what the market does in the short term. It moves up and down often on hearsay and rumor and sheer nonsense. There was no news yesterday. It was just reporters looking for a storyline and fidgety traders trying to make something of the day.
The point is not to let short-term market gyrations faze you or change your strategy. Focus on the bigger picture. The story is the same as it was last week.
The market got oversold because it was pricing in a recession that is still nowhere in sight. It bounced back because investors realized there wasn’t a recession on the horizon. The market rally will likely be tempered from here, however, because we are late in the economic cycle and there is probably a recession looming further down the road.
In the meantime, I believe the market will likely trend higher but not by a lot, favoring the more recession-resistant plays. That’s the story right now but things can change. As always, I’ll keep you posted.
There are two rating changes today, Altria (MO) and American Express (AXP). MO was lowered from a BUY to a HOLD and AXP was changed from a HOLD to SELL HALF.
High Yield Tier
BUY – Community Health Trust (CHCT 32 – yield 5.0%) – This healthcare REIT is a good, safe play in volatile markets. It’s easy to turn sour on a stock like this when the market is rocking. But on days like yesterday you’re glad to have it. CHCT is a great place to get a rare high yield in a very uncertain market.
HOLD – General Motors (GM 38 – 4.0%) – Internally, GM is a great company right now. Last week the automaker announced better-than-expected 2018 earnings and increased earnings guidance for 2019 as cost cuts and solid vehicle sales are driving profits. The stock has soared 24% since the Christmas Eve low but it ran up against China yesterday. GM has big investments in China, and is sensitive to bad news. This week the U.S. cancelled trade talks and China announced the slowest annual GDP growth since 1990. But still, GM was down less than the overall market. The stock still has good momentum.
HOLD – STAG Industrial (STAG 27 – 5.2%) – 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 e-commerce boom also helps STAG because it owns a lot of warehouses and storage facilities. The fat 5.3% yield also has a monthly payout. This stock should be solid.
Dividend Growth Tier
Rating change: BUY to HOLD
HOLD – Altria (MO 45 – 7.1%) – Altria had a big down day yesterday, tumbling 6.91%. It was because Morgan Stanley downgraded the stock from “equal weight” to “underweight”, lowering the price target from 54 to 45. The bank cited the same issues that I have with the company—an accelerating decline in cigarette sales and regulatory scrutiny. Altria invested $12 billion in e-cigarette maker JUUL and Morgan Stanley worries that the regulator crackdown in sales to minors could stunt sales growth. I agree with those issues but I believe there is enough growth to offset the volume slippage. Meanwhile, the stock sells at a five-year low with a 7% yield that should be safe. But until momentum improves I am lowering it to a hold.
Rating change: HOLD to SELL HALF
SELL HALF – American Express (AXP 100 – yield 1.4%) – The company announced fourth-quarter earnings last week and came up short of expectations, $1.74 actual versus the $1.80 consensus estimate. Still, it posted a very solid year with 10% revenue growth. However, with the near-term upside catalyst gone and a market that could still turn downwards, I’m selling half of the position here. In my view, it has more downside risk than upside potential for now.
HOLD – CME Group (CME 186 – yield 1.5%) – As long as market volatility is still prominent I will continue to hold this stock, as crazy markets are good for earnings. It was up about 1.6% on a day when the market fell 1.42%. When the market settles down I will most likely sell all or half of the position. But for now it’s a hold.
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 the market and keep money safe while earning a decent yield. The market may be very uncertain for a while.
HOLD – Consolidated Edison (ED 77 – yield 3.7%) – The performance in ED has been underwhelming but not bad. It held steady in a rough year but underperformed its peers. I’m not necessarily expecting good things from this stock but I don’t expect bad things either. It’s a steady dividend payer in a defensive sector in a market that is unpredictable and could well have more downside. As long as I can’t trust the market I’ll hold ED.
HOLD – Ecolab (ECL 153 – yield 1.2%) – This water treatment and specialty chemical company has been solid in a down market. It has outperformed both its peers and the market in the recent selloff. It’s a recession-resistant company with a very defensive business model. Ecolab is actually a good market hedge because bad markets and downbeat economic news help to lower commodity prices and reduce costs.
HOLD – Hormel Foods (HRL 43 – yield 2.0%) – The stock had solid performance in 2018 even though its sector, consumer staples, had a lousy year. Hormel was a standout in a defensive sector that had disappointing performance. The company has very strong downmarket resilience yet offers what analysts are forecasting to be 10.5% average annual earnings growth over the next five years. Not bad.
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 had been a disappointing performer last year but it is acting much better in the latest market phase, coming off another strong week. Investors may be taking another look at this high yielding and neglected asset class.
HOLD – McCormick & Co (MKC 139 – yield 1.6%) – The stock had a fantastic 2018, up 39%. It was one of the very few packaged food companies that grew underlying sales while increasing margins at the same time. It’s defensive in a rough market as well. However, the stock could be running out of gas. The RB Foods acquisition as well as the tax cuts gave the company a big boost last year, but that will make year-over-year comparisons tough. The company reports fourth-quarter earnings tomorrow, which should be solid.
BUY – NextEra Energy (NEE 177 – yield 2.5%) – NextEra has a great regulated business that provides regular cash flow but it also gets a high level of growth from the unregulated side. The company grew earnings by over 10% per year for the last five years and should do about that over the next five. That’s booming growth for a utility stock, especially one of NextEra’s size. The stock is fairly valued here but with a high rate of growth and defensive characteristics it should continue to be a solid performer.
BUY – UnitedHealth Group (UNH 266 – yield 1.4%) – This health insurance giant continues to ride strong momentum. The stock is up about 10% in the past two weeks thanks in large part to its better-than-expected earnings last week, with 27% higher earnings and 12% higher revenues. The earnings seem to have made the market realize it wasn’t upbeat enough on UNH. It has solid growth drivers after reducing costs and embracing digitization, which should boost profit margins going forward. At 10% below its 52-high with a forward P/E ratio of less than 17x earnings, it’s still a buy here.
HOLD – Xcel Energy (XEL 51 – yield 2.8%) – XEL is much closer to its 52-week high ($54.11) than low ($41.51), and yet still sells at a price/earnings multiple right around its sector’s average. Analysts expect around 6% earnings growth for 2019—very solid for a utility. The stock faces technical resistance around 50.70. It probably has limited upside in the near term but it should still hold up if the market turns south again.
Audio Transcript
[00:00:01] Hi this is Tom Hutchinson from Cabot Dividend Investor with this week’s audio update. I will try every week to send you an audio that will be on the website to supplement the written weekly updates so we can keep in touch. And I can relate to you my thinking of current events in the market and hopefully give you an additional benefit.
[00:00:31] So let’s go with what’s going on this week. Now the market has bounced back very strongly after the panicky December 24th Christmas Eve lows. As a matter of fact it’s up over 10 percent -- about 13 percent -- since then and it’s regained most of the losses it sustained since the highs of September.
[00:01:07] My prognosis on what has happened: selloffs are normal. We haven’t had one in a while. That’s OK. A bull market has to blow off steam to endure.
[00:01:21] This one was worse than most -- the worst in seven years to selloff. And I think it’s because sellers got carried away and started factoring in a recession that’s imminent. And while there isn’t an imminent recession the market looks ahead six months to up to a year. And there’s really no impending recession in that timeframe.
[00:01:51] Markets started pricing one in and are now realizing it’s not going to happen, at least not in that time frame. So it’s rallying back because the economy’s still pretty strong.
[00:02:03] Now yesterday was a volatile day. The Dow finished down over 300 points. At one point it was down I think almost 500 points. And those days will happen again. Market’s still jittery but I want to put those days in perspective focusing on yesterday.
[00:02:25] Yesterday it was the market open after a holiday Monday. Martin Luther King Day where the market was closed and it had to digest the news from Monday. Now the news from Monday was not good. Two things, well actually three things, spooked the market.
[00:02:47] One China announced GDP growth and it was the lowest since 1990. The market’s been worried about the China’s slowdown and there they go with a number worse than 1990. My goodness.
[00:03:04] Then the IMF (International Monetary Fund) downgraded global growth. That’s what happened Monday.
[00:03:23] Then yesterday when the market opened there was news that the White House canceled a trade meeting with China. Now it was more than the market could take and it was back to panic land for most investors.
[00:03:36] But if you look at what really happened it’s complete nonsense. There was no news yesterday. There was no news.
[00:03:45] First of all China has been slowing for seven years because it has still it was growing at 10 percent a year couldn’t possibly sustain that pace. So it’s been slowing down for a long time. Everybody knows it. Now granted it’s slowing more than normal recently because of internal problems and trade issues and what have you but that’s been known for a long time.
[00:04:15] What happened yesterday was their growth rate finally hit below the long ago rate of 1990 which was an inevitable thing to happen on news that was already known the slowest growth since 1990 thing was just a headline grabber that said nothing new happened.
[00:04:40] The IMF downgraded global growth. Oh now the IMF says the global economy is slowing. Well why did they say that because everybody has known the global economy has been slowing for at least six months? The IMF said it was slowing because there is a conference in Davos Switzerland and they had to say something. So they put it in writing that next year we’re downgrading our global growth forecast by two tenths of a percent which is meaningless because they are nowhere near good enough or historically accurate enough to peg global growth within that precision. Two tenths of a percent. That’s nonsense.
[00:05:32] Yeah the global economy is slowing down which I think has been overblown. It had been hitting great levels in 2018. It’s not growing anymore but it’s it’s sustaining a level of growth that’s still pretty solid. It’s not like running out of gas. That’s been overblown.
[00:05:57] Then of course there was a report that the White House had called off a meeting with China. That’s bad for trade negotiations but it turns out that report was false. It just didn’t happen.
[00:06:17] So here we have a day where the market sells off on nothing. Absolutely nothing.
[00:06:22] Why do I mention this? This is the type of stuff that happens in the market in the short term and may well continue to happen based on rumor and hearsay and utter nonsense.
[00:06:37] So try not to let that spook you and focus on the bigger picture the bigger picture. Is the economy still in decent shape? There’s no recession in the foreseeable future. Sure there are problems out there but there always are.
[00:06:57] The economy’s pretty good -- so I think the market looks pretty solid here. Not to say that we can have some scary pullbacks we might but I think the trend will be higher and we’ll have a decent year.
[00:07:24] That said I want to reiterate some of the things I said last week. It’s kind of a bummer that the market’s recovering here. It went down about 20 percent right. Knocking on the door of a bear market didn’t quite get there and part of me says you know I wish we got it over with. That way in not too long period of time we could be starting the next bull market and more confidently invest. But as of now it’s recovering because there’s no recession yet. There may well be a recession looming next year in 2020 or the year afterin 2021. And also a bear market as well that comes with it.
[00:08:17] So the bottom line is I think that the prognosis on the market here is it’s recovering. It’s going to have a problem really taking off and stretching its legs with trouble maybe looming in the next year or two. But I do think we’ll post a pretty good year for 2019 when all is said and done.
[00:08:41] And I also think it’s going to favor the more recession resistant dividend stocks which is where we come in.
[00:08:50] You know people find dividend stocks boring sometimes but really you see the value of it in markets like this where they hold their value and continue to pay you. You know in the tenth year of a bull market a lot of people all they cared about was nanotechnology in the options but it’s back to reality. And some of the more resilient stocks on the market I think are going to be heroes going forward.
[00:09:20] That said there’s some news on a couple of the positions in the portfolio that I want to talk about and one of the stocks is Altria. Cigarette maker Altria was downgraded at Morgan Stanley.
[00:09:36] And the stock fell about 7%t yesterday. Now it’s round $45 at a five year low with a 7% yield. The reasons for the downgrade are not unfamiliar reasons that I haven’t discussed. They feel that cigarette volumes will decrease more than they have in the past and they’re skeptical about the new investments in cannabis company Cronos and ecigarette maker Juul, they’re skeptical that they can afford. A very successful formula is changing. And they’re skeptical about whether it will be successful that they will make up for the slippage in increased volume sales with growth from these two things especially considering the regulators are on the warpath and they’re really clamping down about cigarette sales to minors and also making noise about menthol cigarettes.
[00:10:41] They also fear that Philip Morris, I mean Altra, overpaid for Juul and that given the regulator’s scrutiny it’s going to be hard to make up enough growth to make it worth it. Nothing scares the pants off Wall Street analysts like aggressive regulators. Now there’s cause for concern. I believe that it will take time for Altria to prove this formula, to actually show growth from these investments, more than compensates for the volume slippage as far as regulatory scrutiny is concerned.
[00:11:24] Altra is no stranger to that. It has dealt with that throughout its history and it’s been one of the most successful income stocks on the market. I find it hard to bet against them but it will take a little time to prove they’re going to get enough growth from these new companies.
[00:11:40] In the meantime you have a stock selling at a five year low. So if the market turns south I think it will be more resilient with a 7%t yield that should be safe at least for the foreseeable future while you wait. I downgraded it from buy to hold simply because I want to make sure that the downward momentum has ceased. When the downward momentum ceases I will probably raise it back to a buy.
[00:12:14] Another stock that I changed the rating on was American Express. American Express is a very good credit card company. Credit cards are a very good business. The stock has rallied nicely from the lows of the market, as I said it would. However it’s a little pricey and I think the upside is fairly limited.
[00:12:38] It may be that the the market continues to rally and it’s it’s got a little bit more upside. But I think most of the upside is done and market could stumble again and there will certainly be downside and a credit card company is cyclical. As long as it fears a slower economy and recession it’s going to be hard for it to really take off.
[00:13:06] Bottom line I think the stock has more downside risk than upside potential at this point. So I want to take profits, reap the rewards of the recent rally, on half of it. The other half? We’ll see how it goes. But let’s take some off the table here.
[00:13:27] GM I continue to hold. GM is also a cyclical stock that’s rallied very nicely. It’s up about 20%. So you may ask what is this guy doing -- he sells one cyclical stock and holds another dozen, similar story applies to GM that applies to American Express. To some extent yes. The big bounce back may be over and this cyclical stock’s returning may have run out of gas but GM looks particularly strong here. Internally the results have been fabulous.
[00:14:08] They have to deal with every time there’s bad news about China it hurts GM because they have a big investment there. But long term I think it will be good and it just has momentum here.
[00:14:22] They announced great results that 2018 was better than expected. And they upped their guidance for 2019. Internally they’re doing great. Even with the bad China news yesterday GM was down less than the market. So I think it still could have some momentum here. So I’m holding for now that’s it for this week.
[00:14:48] I hope you enjoyed it. And I’ll talk to you again next week.