August 21, 2024

The Rally Returns, for Now

What a difference two weeks make! From the close on Monday, August 7 to the close on Monday, August 14, the S&P 500 was up about 8% and is again flirting with the high.

The market fell a lot from mid-July to early August. But it has since recovered all the losses. While the S&P is back near the high, the last month has been a wild ride to nowhere. Now what?

A couple of weeks ago, we were spiraling toward recession. Now we’re not. Better economic numbers have come out and there is a sense that those early-August fears were way overblown. Rate cuts are still expected to begin next month, and a recession is off the table for the near term. It looks like we’ll get rate cuts and no recession. The market loves it.

Previously beleaguered interest rate-sensitive stocks and other defensive stocks have been rallying. The top-performing S&P sectors over the past month are utilities, healthcare, and real estate. Investors are reacting to the improved interest rate narrative and a likely still slowing economy.

The market is almost always more resilient than most expect. And things have been good. But there is reason for caution. Although a recession doesn’t appear imminent, it’s on the radar now. The high market has shown vulnerability to negative headlines. And crazy headlines are likely in the next few months. Also, September is historically the worst month for stocks, followed by October.

I still believe it is more likely than not that the market will be higher at the end of the year than it is now. But I will be surprised if we don’t see more volatility and ugly days in the months ahead.

In the meantime, the portfolio is well positioned for uncertainty while still enjoying the current bounty. There are eight portfolio positions at or near the 52-week high. Previously lackluster-performing stocks have come alive again and the relative performance could continue to thrive in a slowing economy.

Recent Activity

August 7
FS KKR Capital Corporation (FSK) – Rating change “BUY” to “HOLD”

Main Street Capital Corporation (MAIN) – Rating change “BUY” to “HOLD”

Eli Lilly and Company (LLY) – Rating change “HOLD” to “BUY”

Visa Inc. (V) – Rating change – “HOLD” to “SELL”

August 14
Purchased Constellation Energy Corporation (CEG) – $182

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 5.1%) – This recently very bouncy infrastructure company stock had a big move higher in July. It pulled back at the beginning of this month but has since recovered and moved near the 52-week high. Brookfield reported solid earnings with 10% funds from operations growth over last year’s quarter. BIPC had been a stellar performer for many years prior to inflation and rising interest rates. But now interest rates are moving significantly lower, and the main threat is now a recession. That’s in Brookfield’s wheelhouse as its crucial assets are highly recession-resistant. (This security generates a K-1 form at tax time.) BUY

Enterprise Product Partners (EPD – yield 7.1%) – This steady midstream energy partnership bent a little but didn’t break in the recent market turbulence. Now, it is right back to within bad breath distance of the 52-week high. EPD has returned 16% YTD and should be a steady performer with a likely higher return by the end of the year. You can slow it down or temporarily interrupt EPD. But its consistent snail-like ascent endures and inches on. Enterprise reported earnings earlier that were solid, up 12% over last year’s quarter. The distribution is also 5% higher than a year ago and there is still an industry standout 1.6 times distribution coverage with cash flow. (This security generates a K-1 form at tax time.) BUY

FS KKR Capital Corp. (FSK – yield 14.2%) – This ultra-high-yielding Business Development Company is also recovering from the recession scare that caused it to be downgraded to a HOLD. FSK also goes ex-dividend in early September. Because the payout is so massive, the date will cause a drop in price. But it appears, at this point, that the recession worry is overblown. While recession is still on the radar, it might be a long way off. That huge payout from FSK should be highly desirable in a more sideways market over the next few months. HOLD

Main Street Capital Corporation (MAIN – yield 5.7%) – Main Street reported earnings that met market expectations. The BDC also reiterated its monthly dividend of $0.245 per share for the rest of the year and announced an additional $0.30 per share supplemental dividend payable in September. The BDC has a lot of small business exposure, which is problematic during recessions. MAIN has recovered from last week’s selloff and is only down 3% in August after having been in an uptrend since last fall. A recession would certainly change the dynamics. However, solid earnings and reduced recession expectations are resulting in the stock regaining lost ground. HOLD

ONEOK Inc. (OKE – yield 4.5%) – This more volatile midstream energy company stock reported earnings with revenues up 31% over last year’s quarter and earnings up nearly 30%. The huge jump is because of recent acquisitions coming online, but the future looks solid also. ONEOK is expected to grow annual earnings by 7.3% over the next three years compared to an industry average projection of 1.9%. OKE pulled back in late July and early August but has since regained its footing and made a new all-time high this week while most of its peers are still below the pre-pandemic high. BUY

The Williams Companies, Inc. (WMB – yield 4.2%) – This less volatile midstream company reported earnings that beat expectations and is strongly recovering from the recent weakness. WMB moves with the overall energy sector amid volatility in the near term like the other midstream stocks. But WMB has been quick to return to form and is now within pennies of the high and has returned 30% YTD. An escalation of tensions in the Middle East could send the energy sector higher and Williams guided to the upper half of 2024 estimates. WMB is still in an uptrend that began in the middle of February. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.1%) – The stock of this cutting-edge pharma company has gotten hot and it just made a new high this week. It’s up 27% YTD. But this is a tough year with falling revenues from the Humira patent expiration. Newer drugs Rinvoq and Skyrizi are killing it with a combined $4 billion in revenue for the last quarter and Humira also did better than expected. AbbVie is well on track to replace the Humira revenues and return to robust profitability next year with an estimated 25.5% earnings growth rate. These are challenging days and AbbVie is getting through them in great shape ahead of much better profitability in the future. BUY

American Tower Corporation (AMT – yield 3.0%) – This cell tower REIT came off the high made at the beginning of the month, but it is still up over 25% since the beginning of May. In addition to the vastly improved interest rate outlook, American Tower was helped by a strong earnings report earlier this month. American Tower reported a better-than-expected 13.4% growth in adjusted funds from operations over last year’s quarter. Growth of existing cell towers is strong as new customers are being added to existing towers and the properties continue to expand in the U.S. and overseas. It also raised guidance for 2024. BUY

Broadcom Inc. (AVGO – yield 1.2%) – It has been an impressive turnaround. After a rare period of weakness for this AI superstar when it fell 26% from mid-June to the first week of August, it’s spiked 24% over the last two weeks. Despite the recent turbulence, AVGO is still up 55% YTD. The selloff in technology is over for now, and Broadcom reports earnings in the first week of September. That could also provide a big boost as has often been the case recently. The AI catalyst isn’t going away and the prognosis going forward is still spectacular. If the selling gets uglier, I’ll buy more as the longer-term prognosis is still spectacular. HOLD

Cheniere Energy, Inc. (LNG – yield 0.9%) – The recession scare of early August knocked the wind out of most energy stocks, including this LNG exporter. But the stock is recovering nicely as those fears have waned. While LNG is vulnerable to weakness in the overall energy sector in the near term, the longer-term trajectory remains excellent. The world still needs U.S. natural gas. Earnings were solid and expansions are on track. In addition to the long-term trend of increasing LNG exports, an escalation in the Middle East war could give the sector and the stock a boost. BUY

Constellation Energy Corporation (CEG – yield 0.7%) – This new addition nuclear power generator is already delivering results in the recent go-go market. It seems to have the right stuff going forward. More investors are becoming aware of the growth in electricity demand. It’s also likely that the economy will continue to slow in the months ahead, and this is a defensive business that should hold up very well. BUY

Digital Realty Trust, Inc. (DLR – yield 3.3%) – The data center REIT has pulled back from the high in July after a big surge. But it has leveled off and is still in an uptrend that began in April. DLR was going strong when other REITs were struggling and now the sector is in a much better position as interest rates are likely to move lower. But the main story is the data center properties that are a high-growth business. Tech companies are forecast to invest $1 trillion in data centers over the next five years to accommodate AI. BUY

Eli Lilly and Company (LLY – yield 0.6%) – This superstar pharma company that has outperformed most “magnificent seven” stocks is on fire again. The earnings report absolutely killed it and guidance was raised by many billions as the weight-loss drug continues to do incredible business while the other drugs aren’t too shabby either. LLY is up 20% since it was raised to a BUY two weeks ago. It’s up 56% YTD and is still below the 52-week high. It also has a likely blockbuster in the newly approved Alzheimer’s drug. It’s expensive from a valuation standpoint but the growth justifies it. BUY

McKesson Corporation (MCK – yield 0.5%) – The pharmaceutical supply chain powerhouse has certainly stumbled. It’s down 13% since the disappointing earnings report last month. Earnings were strong but revenues were less than expected as weight-loss drugs couldn’t keep up with demand. The business is still strong and growing, but when a company whose stock has performed so well disappoints, the market is unforgiving. But MCK has leveled off and it is still up 16% YTD. I expect MCK to resume its uptrend in the weeks and months ahead and post solid returns between now and the end of the year. BUY

Qualcomm Inc. (QCOM – yield 2.0%) – After stumbling badly in the second half of June and July, the chipmaker stock has been moving higher for the past couple of weeks. The selloff came after a huge surge earlier this year, and QCOM is still up 24% YTD. Qualcomm crushed earnings forecasts for the June quarter and guided higher for the September quarter. But the stock fell on the day of the announcement on concerns about weaker-than-expected smartphone sales predicted for the December quarter. But the upgrade cycle is likely coming sometime next year. QCOM will be volatile with the market and the technology sector in the near term, but the longer-term trajectory is still excellent. BUY

UnitedHealth Group Inc. (UNH – yield 1.4%) – After a big move in July, UNH has been bouncing around for about a month, but the new range is still near the high. UNH soared about 20% since early July and made a new 52-week high. Earnings drove the stock. UnitedHealth beat earnings forecasts as it added more patients and pharmaceutical customers despite a continuing negative effect on profits from the February cyber-attack. UnitedHealth also reaffirmed previous guidance for 2024. The market is apparently happy and reassured. It’s also well positioned in a slowing economy as a highly defensive stock. BUY

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.5%) – The recent lameness for this niche REIT seems to be ending. After hitting a 52-week low, ARE has started moving higher. While the other REITs were living it up in the falling interest rate environment, ARE floundered. Although earnings were basically solid and Alexandria reiterated previous guidance, it missed on revenue. However, earnings were only up 5.4% while revenues jumped 7.4%. The lease rates were solid, and Alexandria reported a healthy number of acquisitions. It stumbled after a big surge higher after the earnings report, but the defensive characteristics may serve ARE well going forward. We’ll see. BUY

NextEra Energy (NEE – yield 2.6%) – The regulated and alternative energy utility barely budged in the recent market. NEE is in an uptrend and near the 52-week high. It is a highly defensive utility, and the recession fears make NEE more desirable. NextEra forecasts revenue growth of 8.3% per year over the next three years, compared to average growth of 4.7% for the electric utility group. There is also growth anticipation due to a steep acceleration in electricity demand in the years ahead prompted by manufacturing, electric vehicle growth, and increasing data center electricity demand because of AI. Renewable demand is expected to grow the most. HOLD

USB Depository Shares (USB-PS – yield 5.4%) – Wow, falling interest rates and no recession. Everything looks good for this high-yielding fixed-income security. It’s been through the worst bond market ever and now interest rates are trending down and the price and total return are moving up. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.9%) – Ditto for VCLT. The long-term corporate bond ETF loves falling interest rates. There could be some default issues in the event of a recession, but the fund is highly diversified and will benefit greatly from lower rates as well. BUY

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