January 2, 2025

A Great Year Ends on a Down Note

The year 2024 was another great year for stocks. The S&P was up over 23% for the year. It’s a nice addition to the 26% return last year. It is the first back-to-back 20%-plus return years for the index since 1998.

But the year ended on a sour note. Usually, good years in the market finish strong. But not this time. True, the S&P 500 was down less than 2% in December. But that’s only because the big tech companies are still doing okay. The rest of the market had a terrible month.

Eight of the eleven S&P sectors were down in December. Energy stocks fell about 10%. REITs were down over 9%. And utilities fell over 8%. That’s an ugly month. The culprit was interest rates.

In the weeks following the election, investors loved the prognosis for higher growth, even if it meant interest rates saying highish. But that view soured. Just when the euphoria was wearing off, inflation proved stickier than expected and the Fed indicated just two rate cuts in 2025 (investors had expected four). The benchmark 10-year Treasury yield has soared to 4.6% from 4.1% earlier this month.

A stronger economy is good for stocks. More economic activity drives earnings higher, which ultimately determines stock prices. But it also means high interest rates will be stickier. And it remains to be seen how long it will take before the economy actually gets stronger.

The specter of continuing inflation and high interest rates could be a problem, if the current perception lasts. Investors were moving on from inflation and high interest rates. Rates were supposed to be coming down while the economy remained solid. Stocks largely priced in that good news. The shift in interest rate expectations could drive stocks down further in January.

But pullbacks are normal and healthy in bull markets. Plus, bull markets rarely end after just a little more than two years. There is still the promise of stronger economic growth, the AI catalyst, and interest rates that have likely peaked. The bull market isn’t over. It’s just been temporarily interrupted, and the interruption may continue for a while longer.

Recent Activity

December 11^th
Purchased Ally Financial Inc. (ALLY) - $38.42

December 18^th
AbbVie Inc. (ABBV) – Rating change “HOLD” to “BUY”
Broadcom Inc. (AVGO) – Rating change “BUY” to “HOLD”
SOLD American Tower Corporation (AMT) - $184.85

High Yield Tier

AGNC Investment Corporation (AGNC – yield 15.6%) – I see this high-yielding mortgage REIT as having hit a temporary buzzsaw on the way to better times. The bigger picture is that AGNC is coming off a historically bad period with rising inflation and interest rates into a much better environment with stable or falling rates. In the short term, it has come well off the high as the interest rate narrative has soured since the summer. But AGNC is still hanging tough. It’s also paying a massive yield ahead of what should be much better performance in 2025. BUY

Brookfield Infrastructure Partners (BIP – yield 5.1%) – Like most other utilities, BIP was riding high until the middle of October when the interest rate narrative changed for the worse. The business itself is solid with remarkably stable revenues and a growing dividend. BIP was a superstar performer before inflation and rising interest rates. But it has been a slave to the interest rate narrative for the last two years. While it is likely that interest rates have peaked, the odds of significant declines have diminished of late. Things change, and the longer-term trend for rates seems to be going in the right direction and BIP should improve going forward. (This security generates a K1 form at tax time). BUY

Cheniere Energy Partners, L.P. (CQP – yield 6.5%) – Energy stocks had a rough December. The sector was the worst performing on the S&P. CQP took its lumps in December but is still up 10% since the election. The improving regulatory environment is good news. The administration is highly encouraging of natural gas exports and Cheniere is the country’s largest exporter. The longer-term situation was always strong as the rest of the world desperately needs U.S. natural gas. Now, the short-term situation is improving. (This security generates a K1 form at tax time). BUY

Enterprise Product Partners (EPD – yield 6.7%) – The party is over. After a stellar November when EPD was up 22%, it pulled back 8% in December. The euphoria was bound to end eventually as these normally slow-moving stocks took off like rockets after the election. That’s okay. That upward trajectory was never going to last. But the future is still bright. There should be more oil and gas sloshing around the country in the years ahead. And EPD can move higher. The stock is still well below the all-time high set in 2014. And now earnings are much higher. (This security generates a K1 form at tax time). BUY

FS KKR Capital Corp. (FSK – yield 12.9%) – This Business Development Company (BDC) is one of the few cyclical stocks to not have an awful December after rallying strongly after the election. It even endured an ex-dividend without a selloff. FSK is a strong beneficiary of the Trump victory. The perception of high economic growth going forward is exactly what FSK needed to make a new high. It has a portfolio of smaller companies that tend to be economically sensitive. The prognosis just got better going forward. BUY

Main Street Capital Corporation (MAIN – yield 7.1%) – As a BDC, this story is very similar to that of FSK. Main’s portfolio of companies not only makes high-interest loans, but it also takes equity stakes. The equity stakes are the primary reason the total returns have been better than just about every other BDC. MAIN broke out to new all-time highs this year and just made a new one. MAIN is a rare stock that didn’t have a December swoon. It’s near the high despite the pullback in many cyclical stocks. The improved economic outlook leaves room for further appreciation. BUY

ONEOK Inc. (OKE – yield 3.9%) – This stellar midstream energy company has certainly cooled off. After soaring 18.5% in November, it lost about half of that gain in December. But OKE has still returned about 50% for the year. I’m still bullish. The market loves the new acquisitions of Medallion Midstream and Enlink Midstream (ENLC), as the new additions will be accretive immediately. The story remains strong as recent actions will enhance earnings into a future that just got better with the election. HOLD

The Williams Companies, Inc. (WMB – yield 3.5%) – Ditto for WMB. It was on fire but has pulled back in December. But it’s still up 49% YTD. The pullback from the November high is just a cool-off from the recent torrid pace in not only WMB but the midstream energy group. But the future is bright. Williams guided to the upper half of 2024 estimates and is still in an uptrend that began in the middle of February. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.7%) – While this pharmaceutical and biotech company is more than 17% below the high made this past fall, it has still returned over 15% YTD. All things considered, the stock has performed well, and the future looks bright. This was supposed to be a tough year with revenues falling from the Humira patent expiration. But the company is turning the corner as newer drugs are taking over and revenues are expected to soar in 2025. The main thing holding ABBV back will fade next year. It performed well in a crummy year and much greener pastures lie ahead. BUY

Ally Financial Inc. (ALLY – yield 3.4%) – Financial stocks really cratered in December after a big November following the election. Investors changed their tune and started worrying about higher rates for longer. But next year looks very good for the sector. Short-term interest rates will move lower, the economy is expected to be solid, and the regulatory environment will be much better. Other financial companies made huge moves in recent months, but ALLY was held back because of a temporary situation. It is the nation’s leading online bank, and it is well positioned in the high-growth area of a hot sector. Analysts are expecting earnings growth of 40% in 2025. ALLY’s spike may still be ahead. BUY

Broadcom Inc. (AVGO – yield 1.2%) – This semiconductor, software and artificial intelligence juggernaut really got a boost from earnings earlier this month. AVGO soared 38% in the two days following the report. It has cooled off since and pulled back a little, but it is maintaining almost all the gains. The company said demand for its AI chip (XPU) is booming and expects it to generate revenues between $60 billion and $90 billion by 2027. Revenue was $12.2 billion in fiscal 2024. The revelation has captured the imagination of investors. The stock has returned 120% this year and the future for the stock still looks bright. HOLD

Cheniere Energy, Inc. (LNG – yield 0.9%) – This liquid natural gas (LNG) exporter is a definite beneficiary of the Trump election. Like most energy stocks it soared after the election but pulled back in December. But it didn’t pull back much and is still up 11% since the election. Cheniere stands to benefit from a friendlier regulatory environment, more natural gas production, cheaper domestic prices, and encouragement of natural gas exports. The longer-term trajectory should be strong as the world will continue to demand U.S. natural gas and Cheniere is the largest exporter. The short-term situation just got better too. BUY

Constellation Energy Corporation (CEG – yield 0.6%) – This nuclear power generator is up 98% YTD and 22% since being added to the portfolio in August. Earnings have been strong, but the stock is really being powered by future growth prospects in terms of large energy deals with technology companies. Constellation made a huge deal with Microsoft (MSFT) to provide power to a new data center with a reopening of the Three Mile Island generator. Other energy and tech companies have since inked similar deals. Tech companies must secure power sources for the massive energy demand of AI. Constellation is a prime candidate with dependable carbon-free power. The new administration will likely bring a friendlier regulatory environment, making more deals likely. HOLD

Digital Realty Trust, Inc. (DLR – yield 2.8%) – This data center REIT made a huge jump after the company stated that demand for data center AI space is booming in the last earnings report. DLR was downgraded to a HOLD last month on price alone. The stock has pulled back since but it’s still up 35% YTD and 57% since being added to the portfolio in July of 2023. DLR doesn’t trade with the ebb and flow of the interest rate narrative like most REITs. It trades more like a tech stock because of the AI growth catalyst. The future still looks bright as data centers are booming. HOLD

Eli Lilly and Company (LLY – yield 0.8%) – The superstar drug company stock has been in a funk since the summer. It’s down 21% from the high made in early September. LLY is still up 32% for the year, and consolidation is probably healthy. The company also announced a $15 billion stock repurchase program and a 15% dividend hike. The repurchase program replaces the $5 billion that was just completed. It is also the seventh consecutive year of a 15% dividend hike. There is also some trepidation in the sector regarding the nomination of RFK Jr. for HHS Secretary. But LLY is unlikely to stay down for long. It is on track to grow earnings by around 70% per year in the years ahead. BUY

McKesson Corporation (MCK – yield 0.5%) – McKesson recovered all the summer and fall dip in a very short time, but it resumed a funk in December. The pharmaceutical distributor took a plunge after second-quarter earnings missed because of supply disruptions. But the third-quarter earnings alleviated that concern, and the stock took off again. The healthcare sector is reeling somewhat from the RFK nomination right now. But hopefully, MCK will get back to slowly trending ever higher in the year ahead as its customer base grows all by itself because of the aging population. BUY

Qualcomm Inc. (QCOM – yield 2.2%) – This semiconductor giant reported earnings that surpassed expectations with year-over-year revenue growth of 19% and earnings growth of 80%. But the performance has been a bummer for a while. QCOM plunged over 30% from the June high in the subsequent two months and has been going sideways ever since. The market wants to see strong U.S. smartphone sales from an AI upgrade cycle. But that doesn’t appear to be happening yet, although analysts think it is a possibility next year. But when this stock moves it easily makes up for lost time. And it will take off at some point. Look at AVGO. BUY

Toll Brothers, Inc. (TOL – yield 0.6%) – The luxury homebuilder stock has fallen 26% from the late November high. In addition to the overall market rolling over, there was some bad news on the home-buying front. There are industry-wide affordability concerns. The median age of first-time homebuyers reached 38 years old, an all-time high. New homebuyers comprised 24% of the market over the last year, an all-time low. But Toll Brother’s results are still stellar as luxury homes are somewhat insulated from the trends.

Earnings beat expectations with revenues up 10.3% and earnings up 12.6% over last year’s quarter. Toll Brothers also reported that unit sales were up a whopping 25% for the full year versus 2023. The news is also improving. Pending home sales were up for the fourth straight month in November and increased 6.9% over the past year. TOL will bounce around with the news, but the longer-term trends are strong. BUY

UnitedHealth Group Inc. (UNH – yield 1.7%) – After soaring to a new high in early November, it’s been one thing after another for this health insurer. The stock is down 16% in December. UNH initially fell because of trepidation over the RFK nomination. Then the CEO was assassinated. Then, President-elect Trump made comments about “eliminating the middleman” in the healthcare industry. We’ll have to see if the regulatory environment changes for the worse. The stock can overcome everything else. UNH has also come off the bottom and can hopefully get some upside traction in the new year. BUY

Safe Income Tier

NextEra Energy (NEE – yield 2.9%) – Things were bad for NEE. Then they got very good. Then things turned rotten again. Now, NEE is leveling off and appears to have found a new-term bottom. Of course, the volatility is from the macro environment and not the internal operations of the company. The regulated and clean energy utility is doing great. NextEra expects to deliver 10% average earnings growth over the next several years, and it has a long track record of successfully delivering. The utility also stands to benefit from the increased electricity demand from AI and data centers, which will opt for clean energy whenever possible. HOLD

USB Depository Shares (USB-PS – yield 5.6%) – The environment is still good for fixed income despite the recent change in interest rate expectations. These securities love falling interest rates. And interest rates are at least not likely to trend higher and may even move lower in the quarters ahead. 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. 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. The long-term bond ETF doesn’t have the upside leverage that USB-PS does. But the trend is likely to serve this security well over the next year. BUY

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