The Meddling Fed
I want to believe that we operate in free markets. I like to think that the pure meritocracy of capitalism drives the market. While that is true over time, I have to admit the Central Bank has undue influence in the near term.
Look at the recent market behavior. In December the market was crashing. We came within a whisker of a bear market, down 19.8% from the high. Since then, the market has surged 20% higher, up 13% so far this year and now less than 4% from the all-time high. The only tangible difference in this tale of two markets is the Fed.
The Fed announced a new policy of “patience” and indicated that it will stop raising the Fed Funds rate for now. Apparently that made all the difference, because all the other problems that spooked the market in December are still with us. The global economy still stinks. There’s still no trade deal with China. And it is still an open question what this year’s earnings will look like.
To investors, the Fed announcement pushed the next recession further into the future. And the market transformed from suicidal to euphoric on a dime. But where do we go from here?
I see three possible scenarios as most likely. One, the economy slows more than expected for the reasons mentioned above. That’s not good. That would put a near-term recession and bear market back on the table. Two, the economy is stronger than expected. The problem with that is that it would likely reignite the Fed to start raising rates again. Either the economy slows all by itself or the Fed will induce decline.
Of course, it’s also possible that the economy is strong enough to stay out of the doghouse but not strong enough to prompt Fed action. This is probably the best-case scenario for the market.
Regardless of what happens, I have a hard time seeing how the market rises 100% or even 50% from here before the next bear market. In short, it’s likely that things get ugly again before they get great again.
But that isn’t as bad as it sounds. The market could stay decent for a while. And even if we do stumble into a bear market it probably won’t be that bad. Historically speaking, in the absence of a major bubble or skyrocketing inflation, the average bear market isn’t much worse than the selloff we saw late last year. How hard was that to endure?
Meanwhile, we have the ideal environment for the relative performance of dividend stocks. You are in the right place at the right time. This late-stage economic cycle is where dividend-paying stocks typically thrive. As well, they generally hold up much better if there is a bear market.
Take heart. You can still make good money, only under a different set of circumstances than have existed in recent years. Meanwhile, the portfolio had another good week.
High Yield Tier
HOLD – Community Health Trust (CHCT 34 – yield 4.8%) – This healthcare REIT had a bad week at the beginning of the month when it announced lower-than-expected earnings. But even after the bad week performance numbers are impressive. Not only did the stock return outperform the overall market by double digits in 2018, but it has outperformed on the upswing since the December lows as well. When things are bad it’s good and when they’re good it’s better.
BUY - Enterprise Product Partners (EPD 29 – yield 6.2%) – After a bloodbath in the industry over the last several years, this bluest of blue-chip energy infrastructure company is turning around. EPD returned more than 20% over the past year compared to just under 5% for the overall market. Yet in a market that’s getting more expensive it’s still cheap, selling 30% below the 2014 high and at valuations far below its five-year average. As well, there is a tangible catalyst for stronger growth. Enterprise embarked on a huge growth plan in 2017 that will start coming to fruition this year as five new major projects will come into service.
HOLD – General Motors (GM 38 – 4.0%) – This is still a company with solid internals in a deteriorating external environment, as I’ve previously mentioned. It’s had a good year so far and good momentum. But this week it’s in President Trump’s crosshairs. He sent out a Tweet berating the company for its planned closure of a Lordstown, Ohio plant and asked the CEO to stop the closure. I don’t know what the company will do about it. But it gave GM some unneeded bad publicity and it’s down about $1 for the week. It shouldn’t be a significant factor but we’ll see how things play out. It’s still a HOLD for now.
HOLD – STAG Industrial (STAG 28 – 5.0%) – STAG is one of the best REITs in the promising Industrial space, consistently outperforming both the overall market and the REIT index. But it is currently running up against technical resistance near the 52-week high. For now it’s a hold, but if it can form a base here I might upgrade it to a buy. I’ll be watching it closely.
Dividend Growth Tier
BUY – AbbVie (ABBV 81 – 5.3%) – Can this biopharmaceutical giant overcome increasing overseas competition for its top-selling autoimmune drug Humira? That uncertainty has resulted in this top-performing stock falling almost 30% over the past year. I’ve often made the case that it has more than enough fire power in its newly launched drug and industry leading pipeline to do just that. This week the company’s President made a similar case including lesser-known promising developments with the early-stage pipeline as well. The market liked it and the stock moved up a couple bucks.
BUY – Altria (MO 56 – 5.6%) – Can this historical income investing juggernaut replace increasing rates of cigarette volume slippage with growth from new investments in e-cigarettes and marijuana? That is the question the market will grapple with in the quarters and years ahead. Early reports have been very good. Marijuana stocks are booming as increased legalization is seeming inevitable and e-cigarette maker JUUL is growing profits at obscene rates. But yesterday the outgoing FDA commissioner reported a meeting with Altria and JUUL as “difficult”, indicating continuing hostility from regulators regarding e-cigarette sales. The stock fell 2.25%. Dealing with regulators is nothing new for Altria and the stock has done well since being added to the portfolio. But you can probably expect a two steps forward, one step back dynamic like this going forward.
HOLD – American Express (AXP 113 – yield 1.4%) – This credit card company is doing well, continuing to grow the business in an increasingly cashless world. It just had its most profitable year ever with earnings per share growth of 24% over the prior year. It’s also relatively cheap, selling at just 14.5 times earnings, well below the five-year average. As well, the stock continues to forge higher every week. The only thing stopping me from raising it to a “BUY” is an abundance of caution stemming from my lack of trust in the global economy.
Safe Income Tier
BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.1%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.7%)
It’s nice to have something in the portfolio that isn’t vulnerable to a market downturn. These funds fit the bill. The yield isn’t great but it’s something. As long as there are a lot of risks out there and we seem to be in the late stages of the economic cycle these short-term fixed income funds are worth holding.
HOLD – Consolidated Edison (ED 85 – yield 3.6%) – This stodgy utility has been a superstar of late. The stock has been relentlessly pushing higher since the end of January and has broken through the old 52-week high. Performance has slowed over the past week but the stock is worth holding onto. It’s pricey now but the momentum could last a bit longer.
HOLD – Ecolab (ECL 175 – yield 1.1%) – This chemical and sanitation company just keeps rolling on, delivering stellar market beating performance over the past few. It’s up 19% so far in 2019 and 28% in the past year. It just blew through the 52-week high with no signs of stopping. The stock just continues to deliver winning results and until that changes just enjoy the ride.
Rating change “SELL HALF” to “HOLD”
HOLD – Hormel Foods (HRL 43 – yield 2.0%) – Last week I sold half of the position in this food stalwart. After a great 2018 the stock has vastly underperformed the market in the last three months. It also faces risks with the possibility of increased China tariffs. With the stock stuck in the mud it seemed prudent to take some profits off the table. I’ll keep a watchful eye on how it performs from here.
BUY – Invesco Preferred ETF (PGX 14 – yield 5.7%) – This is a great place to diversify away from stocks and bonds and get a high yield in a portfolio of preferred stocks. After some rough performance last year the market has seemingly decided that it likes this asset class again. Price action has been great and the yield is fantastic. Last week I raised it to a BUY.
HOLD – McCormick & Co (MKC 140 – yield 1.6%) – The action in the stock of this spice company has been different than that of the other stocks in this portfolio. After a blowout 2018 where the stock returned 39% the market gods got even with it after a slightly-below-consensus earnings report in January. But since then the stock has done nothing but relentlessly push higher every week. It will report earnings again next week. There isn’t any reason to believe they will disappoint and the stock is still well off the highs.
BUY – NextEra Energy (NEE 189 – yield 2.6%) – This best-in-class utility stock offers both steady income and a lot more growth than the average utility. It should continue to grow the dividend at a strong clip in the quarters and years ahead. It’s also blown past the 52-week high and shows no signs of stopping, yet remains relatively inexpensive.
BUY – UnitedHealth Group (UNH 257 – yield 1.4%) – This healthcare insurance giant got its mojo back. After a couple subpar weeks the stock sprung over 7% higher this past week. Investor concern about recent political noise about new legislation regulating healthcare seemed to realize what I had been saying over the last couple weeks—that the possibility of anything getting done is remote. Meanwhile, earnings growth remains on track to be in the mid teens for the foreseeable future and business is generally booming.
HOLD – Xcel Energy (XEL 56 – yield 2.9%) – The stock blew right past the 52-week high and still has more upside momentum. Sure, Utilities have been the best-performing sector of the market over the past year but XEL has nearly doubled the return of its own index during that period. It’s not a buy here because it is bumping up against the 52-week high but there is no reason to sell as long as the outperformance continues.
