November 20, 2024

A Pause in the Euphoria

After a huge post-election rally, the market leveled off.

The S&P 500 soared 5% in the three days after the election. Since then, it hasn’t pulled back with any significance, but it has stopped going up.

The euphoria following the election was really in two parts. One was the removal of a big uncertainty. There could have been a disputed outcome that took weeks or months to resolve. But the election was all over in the early morning hours following the day of the election. The market hates uncertainty and this was a major event coming off its plate.

The other part of the rally is the anticipated higher level of economic growth. Trump is perceived by investors as being better for economic growth while Harris was viewed as more of the same. The election has prompted a rally in cyclical stocks as well as a spike in interest rates. There has also recently been some consternation in the healthcare sector.

The nomination of Robert F. Kennedy, Jr. as Secretary of Health and Human Services is making healthcare investors nervous. All four healthcare positions, including AbbVie (ABBV), Eli Lilly (LLY), McKesson (MCK), and UnitedHealth Group (UNH), have fallen significantly since the nomination announcement. RFK has expressed skepticism about weight-loss drugs and overall drug pricing. We’ll have to wait and see how the nomination and possible policy changes unfold.

Meanwhile, energy stocks are loving life. All three midstream energy stocks including Enterprise Product Partners (EPD), ONEOK, Inc. (OKE), and The Williams Companies (WMB) are up significantly since the election and making new highs. Natural gas exporter Cheniere Energy (LNG) and its recently added subsidiary Cheniere Energy Partners (CGP) have also rallied. These companies will benefit from the likely increase in oil and gas drilling and a much more fossil fuel-friendly regulatory environment.

Investors still expect a higher level of growth in the future, but that future might take a while. Trump won’t assume office for two months and it will be a while after that before policies are changed and longer still until those changes have a tangible effect. The market hates waiting. The near future is more likely a period of limbo. And one in which war risks are escalating.

The new era is coming. But not quite yet.

Recent Activity

November 13
Sold Alexandria Real Estate Equities, Inc. (ARE) - $108.62

FS KKR Capital Corp. (FSK) - Rating change – “HOLD” to “BUY”

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

NextEra Energy (NEE) – Rating change – “BUY” to “HOLD”

Purchased Cheniere Energy Partners, L.P. (CQP) - $51.94

High Yield Tier

AGNC Investment Corporation (AGNC – yield 14.9%) – The mortgage REIT had been hitting new highs but took a hit after the earnings report in mid-October. Costs were higher and the net spread shrank from the prior quarter. Although interest rates are likely to trend lower over the next year, the still-high rates are biting. The deterioration of the interest rate story is more of a short-term issue. The stock is still on track for improving performance over the next year, AGNC has also come off the recent bottom and has been trending higher in November. BUY

Brookfield Infrastructure Partners (BIP – yield 4.7%) – As with just about all utilities and REITs, BIP has pulled back since the middle of October. It has, however, held up relatively well since the election and another spike in interest rates. After struggling mightily for what seemed like forever, BIP is up over 50% since the middle of April. This unique utility had been a stellar performer for many years prior to inflation and rising interest rates. But now interest rates have peaked and are highly likely to trend lower. (This security generates a K-1 form at tax time.) BUY

Cheniere Energy Partners, L.P. (CQP – yield 6.5%) – The price of this liquid natural gas exporting partnership doesn’t move much because the security is mostly about the quarterly payout. But the price is up over 11% just since the election two weeks ago. There’s a good reason for that. The regulatory environment should be a lot friendlier as the new administration will encourage LNG exports. But there’s something else too.

Officials at the European Union expressed interest in getting LNG from the U.S. instead of Russia. That would be a big increase in the LNG export market; although it wouldn’t happen soon, it’s a big boost to the future possibilities of the export market. The longer-term trajectory should be higher as the world will continue to demand U.S. natural gas and Cheniere is the largest exporter. (This security generates a K-1 form at tax time.) BUY

Enterprise Product Partners (EPD – yield 6.7%) – The good times are rolling. Energy stocks have been on fire since the election and midstream energy companies are benefiting. The anticipation of a much more fossil fuel-friendly administration is being seen as an unambiguous positive for the whole sector. We’ll see how long the strong momentum lasts. EPD had been wallowing around since early spring, but it has soared to a 52-week high and the highest price in more than nine years. EPD is up 12% already in November and has returned 27% YTD. (This security generates a K-1 form at tax time.) BUY

FS KKR Capital Corp. (FSK – yield 13.2%) – This Business Development Company (BDC) 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. FSK is mostly about the huge dividend, but the price has moved up over 6% since the election two weeks ago. When a security has a payout and yield of this size it usually pulls back after the quarterly dividend gets priced out of the stock. It held up nicely after the September dividend, but we’ll see about the December one, especially after the recent price increase. BUY

Main Street Capital Corporation (MAIN – yield 5.5%) – As a BDC, this story is very similar to that of FSK. Main’s portfolio of companies not only makes high-interest loans but 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. But the improved economic outlook leaves room for further appreciation. At the same time, not only does it yield 5.5% based on the regularly scheduled monthly dividend, but the yield is 7.9% if you include the supplemental dividends. BUY

ONEOK Inc. (OKE – yield 4.1%) – This midstream energy company stock is hot stuff. It’s a high-yield stock that has returned 66% YTD and has moved a stunning 22% higher in November so far. OKE tends to be more volatile than its peers, and that has been a good thing since the election. Earnings were stellar and the company raised 2024 guidance. But the main catalyst has been the recent acquisitions of Enlink Midstream (ENLC) and Medallion Midstream, which are expected to close in the fourth quarter and be accretive to earnings right away. The stock is at an all-time high and may have further to run. HOLD

The Williams Companies, Inc. (WMB – yield 3.3%) – It’s another day and another high for this midstream energy company stock. Without a lot of fanfare, WMB has returned about 69% YTD and it’s up 12% so far this month. Midstream energy companies have been killing it since the election. Williams guided to the upper half of 2024 estimates and is still in an uptrend that began in the middle of February. WMB is within a whisker of the all-time high set in 2014. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.9%) – Healthcare stocks have been struggling for the last couple of weeks on fears of what RFK Jr. might do as head of Health and Human Services. ABBV is down 17% since November 8. ABBV was riding high, and half the position was sold then. It’s not just fear of RFK though. ABBV crashed over 12% after it reported that its Schizophrenia drug flopped in phase II trials. The company had high hopes for the drug. AbbVie acquired Cerevel Therapeutics for $8.7 billion in August and this drug was a big part of the reason for the purchase. But that’s life with big pharma. ABBV is getting through this tough year with flying colors ahead of greener pastures in the years ahead. HOLD

American Tower Corporation (AMT – yield 3.3%) – This cell tower REIT has struggled mightily since September after it had been riding high. Sure, REITs have been taking on the chin a bit after the election, and interest rates have spiked higher. But AMT is down 20% from the high. And it should be somewhat insulated from sector weakness because it deals in cell towers and mobile data growth. Look at DLR for heaven’s sake. Earnings were weak because of a temporary lull in demand. It’s still a growth business, so I will wait a little longer to see if AMT can turn things around. But it’s on thin ice. HOLD

Broadcom Inc. (AVGO – yield 1.3%) – This is an important week for Broadcom. Artificial intelligence bellwether Nvidia (NVDA) reports earnings on Thursday. That company’s earnings set the tone for AI stocks, and AVGO is usually affected. It could still turn out to be a big quarter for AI stocks. The price movement since October has been encouraging. The longer-term situation is great, and we will have to wait and see if AVGO gets a near-term boost. BUY

Cheniere Energy, Inc. (LNG – yield 0.9%) – This liquid natural gas (LNG) exporter is benefiting bigly from the Trump election. LNG is up over 15% since the election. Energy stocks have rallied. Cheniere also reported strong earnings. Consensus expectation is for Cheniere to grow revenue at an average of 11% over the next three years compared to forecast revenue growth of 3% for the oil and gas industry over the same period. The longer-term trajectory should be higher as the world will continue to demand U.S. natural gas and Cheniere is the largest exporter. The regulatory environment should be a lot friendlier as the new administration will encourage LNG exports. BUY

Constellation Energy Corporation (CEG – yield 0.6%) – CEG had a big 16% down move between late October and early November. Although earnings were stellar, nuclear energy stocks plunged after the Federal Regulatory Commission shot down Amazon’s (AMZN) recently announced nuclear deal with Talen Energy (TLN). The decision is a sign that attempts by tech companies to hook up data centers directly to sources of power could face obstacles from regulators. Constellation’s Microsoft (MSFT) deal wasn’t mentioned, but the news has a chilling effect on the potential for more deals going forward. CEG has rallied since the election, likely on the expectation of a more accommodative regulatory environment going forward. HOLD

Digital Realty Trust, Inc. (DLR – yield 2.7%) – Digital Realty had an earnings report that went well, and the stock soared to a new high. It had pulled back a bit since late October but has found new strength recently and is back near the high. It wasn’t that the earnings were so good, although they were solid. It was the company’s statement indicating that demand is booming because of AI. That bodes very well for future earnings and the stock price. The main story is that data center properties are a high-growth business. BUY

Eli Lilly and Company (LLY – yield 0.6%) – The superstar drug company stock is struggling more than it has in years. LLY is down 25% from the late August high and nearly 20% since the earnings report fell short in late October. The stock fell after earnings as sales of the heralded weight-loss drub fell short of lofty expectations. But the selling accelerated as the nomination of RFK Jr. for HHS Secretary spooked the sector and Lilly in particular. He has expressed skepticism about weight-loss drugs as well as overall drug pricing.

The weight-loss drug is likely just emerging from the initial euphoric stage. But it is still a likely mega-blockbuster. The RFK stuff may be an overreaction. It’s hard to say at this point. But regardless, this is still a company on track to grow earnings around 70% per year in the years ahead. But the uncertainty may hold the stock back for a while. BUY

McKesson Corporation (MCK – yield 0.5%) – McKesson is simply a pharmaceutical distributor and is less affected by possible new HHS policies in the new administration. But the healthcare sector weakness has been enough to quell the stock’s ascent. It was on fire and has leveled off over the past couple of weeks. Earnings were strong, and the company raised guidance for next year. It looks like the stock is back in business and ready to continue reflecting the fact that its customer base grows all by itself because of the aging population. BUY

Qualcomm Inc. (QCOM – yield 2.1%) – This semiconductor giant reported earnings that surpassed expectations with year-over-year revenue growth of 19% and earnings growth of 80%. The strong quarter was fueled by a wave of launches of flagship Chinese smartphones. The new quarter is off to a strong start as well with automotive sales expected to rise 50%. Despite the good news, QCOM has fallen back to pre-earnings levels after an initial spike. 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 strong possibility next year. Maybe QCOM can get a bump from the NVDA earnings. BUY

Toll Brothers, Inc. (TOL – yield 0.6%) – The luxury homebuilder had been pulling back since the middle of October because of rising mortgage rates. But it spiked higher after the election. The expectation of a stronger economy is counterbalancing the spike in mortgage rates as investors anticipate more homebuying activity going forward. The main event for TOL over time is the fact that there is a short supply and massive pent-up demand for new homes. Sure, the market and the stock can always bounce around in the near term because of mortgage rates and other things, but the central reason to buy this stock just got better. BUY

UnitedHealth Group Inc. (UNH – yield 1.5%) – The health insurance behemoth doesn’t seem to like the RFK nomination either. It was partying at a brand-new high just a week ago but has pulled back 8% just like that. The healthcare insurance industry is certainly highly susceptible to government regulation and changes in policy. Again, we will have to wait and see how UnitedHealth will be affected by changes in policy. But so far, investors are mildly concerned. BUY

Safe Income Tier

NextEra Energy (NEE – yield 2.7%) – The change in the interest rate narrative toward higher rates for longer is having a negative effect on NEE as well as other stocks in more interest rate-sensitive sectors. NEE was red-hot but has fallen 12% from the high in early October. But the longer-term trends are still solid. The company expects to deliver 10% average earnings growth over the next several years. It also stands to benefit from the increased electricity demand from AI and data centers, despite the recent pullback in that trade. But the higher growth expectations are probably not good for substantially lower rates soon. HOLD

USB Depository Shares (USB-PS – yield 5.3%) – 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 4.7%) – 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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