September 18, 2024

A New Era of Easing Begins

It’s a new era, a changing of the guard. This week a Fed easing cycle starts as the Fed will begin to lower the Federal Funds rate after the steepest hiking cycle in decades. The easing cycle is expected to last for years.

The market likes it. All the losses from the ugly start to September have been erased, and the S&P 500 is on the cusp of the all-time high.

The Fed Funds rate was raised from 0% to 5.5% over just an 18-month span in 2022 and 2023 in order to combat the highest inflation in 40 years. The Fed Funds rate has remained at a multi-decade high of 5.50% for more than a year. But relief is finally arriving.

Of course, the market will immediately move to speculation mode over the size and pace of rate cuts. Investors will obsess over what the Fed says at the meetings and whether that means steeper or slower cuts going forward, and what those anticipated cuts mean for the economy and the market. But regardless of what the Fed does or says this week or next month, the rate cutting cycle will begin and last for a long time.

Interest rates are almost certain to trend lower in the years ahead. That’s a big change from the soaring and multi-decade-high rates of the last couple of years. It is a huge boon for interest rate-sensitive stocks that have struggled in the recent past.

A new era has been anticipated. The best performing of the eleven S&P 500 stock sectors for the past one-month and three-month periods are Real Estate and Utilities. The worst-performing sectors last year are among the best-performing this year. Current portfolio positions at or near the 52-high include utilities stocks Brookfield Infrastructure Partners (BIP) and NextEra Energy (NEE) as well as REITs Digital Realty Trust (DLR) and American Tower Corp. (AMT).

These reawakened stocks are still well below the all-time highs and are still cheap and high-yielding with newfound momentum.

Recent Activity

August 28
Qualcomm (QCOM) – Add 2/3 to position

September 11
Buy AGNC Investment Corp. (AGNC)

Broadcom Inc. (AVGO) – Rating change “HOLD” to “BUY” and add ½ position

ONEOK Inc. (OKE) – Rating change “BUY” to “HOLD”

AbbVie (ABBV) – Rating change “BUY” to “SELL 1/2”

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

High Yield Tier

AGNC Investment Corp. (AGNC – yield 13.6%) – This new high-yielding mortgage REIT has been moving higher in the good market. The Fed rate cut could also drive it higher in the near term as it directly benefits from lower short-term rates and falling long-term rates. AGNC has generally been a good stock to own over the long term for total return. But there are good times and bad times to own it. It has been a bad time for most of the last two years. But now it looks to be in the early stages of a good time. BUY

Brookfield Infrastructure Partners (BIP – yield 5.0%) – The good times are rolling as this infrastructure behemoth just hit a new 52-week high. It looks like BIP is on its way back to the high 30s, where it was before the market got ugly for REITs late last year. It didn’t like the high interest rates because it raised costs and investors opted for fixed-rate alternatives. But that situation is reversing. BIP 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 K11 form at tax time.) BUY

Enterprise Product Partners (EPD – yield 7.1%) – Although this steady midstream energy partnership has returned (between dividends and appreciation) over 17% YTD, it has been rangebound since the spring. It got looked over by investors who were rediscovering the dirt-cheap REITs and utilities. But EPD is back to within pennies of the 52-week high. The prognosis is still excellent, and the stock could break out beyond the old high in the next few weeks. EPD tends to be very solid in a turbulent market and should trend higher as more investors opt for dependable income in the increasingly volatile market. (This security generates a K-1 form at tax time.) BUY

FS KKR Capital Corp. (FSK – yield 14.1%) – WOW. This ultra-high-yielding Business Development Company went ex-dividend last week and the price barely moved. 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. But the upside momentum met that downside catalyst head-on and greatly mitigated the damage. While recession is still on the radar, it might be a long way off, and 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 took a hit in early August but it has recovered and leveled off and it barely budged in the down market in the first week of September. A recession would certainly change the dynamics. However, solid earnings and reduced recession fears are leveling the stock. Earnings met market expectations last quarter, and the BDC 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. HOLD

ONEOK Inc. (OKE – yield 4.2%) – The prognosis for this midstream energy company changed for the better earlier this month. ONEOK announced $5.9 billion in acquisitions of two companies, pipeline company Enlink Midstream (ENLC) and Medallion Midstream. The deals are expected to close in the fourth quarter and be accretive to earnings immediately. The company conservatively expects a 5% jump in earnings and a 15% increase in cash flow through 2028. It greatly adds presence in the high-growth Permian Basin and adds predictable fee-based business. The market likes the deal as OKE has been making new all-time highs for the last several sessions and the stock is up over 38% YTD. HOLD

The Williams Companies, Inc. (WMB – yield 4.2%) – This midstream energy company continues to impress and is within pennies of the 52-week high. It’s well worth noting that Energy is the worst-performing market sector over the past month and the second worst-performing over the last three months, but the midstream companies are remaining solid. The likely reason is they have little commodity price exposure and offer a high income in an uncertain market. 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 3.2%) – One-half of the position of this cutting-edge Pharma company stock was sold last week because it has a long track record of pulling back after surges like it just had, up 28% since the end of May. But the company is operationally solid. This was supposed to be a tough year with falling revenues from the Humira patent expiration. But investors are impressed that newer drugs Rinvoq and Skyrizi are killing it with a combined $4 billion in revenue for the last quarter and are increasingly confident of the company’s ability to replace the lost Humira revenue. ABBV is getting through this year in spades ahead of greener pasters next year when management expects the company to return to “robust growth.” HOLD

American Tower Corporation (AMT – yield 2.9%) – The cell tower REIT had a huge upside move since April, up a whopping 38%. The REIT did pull back in August but moved back to a new high last week while the overall market sort of floundered. AMT is still in an uptrend that began in April. Earnings were solid, and the stock is now near the highest level in about two years. The prognosis looks bright as customers are being added to existing towers and the properties continue to expand in the U.S. and overseas. American Tower also raised guidance for 2024. BUY

Broadcom Inc. (AVGO – yield 1.3%) – This AI powerhouse was upgraded last week and the other one-half position was added back. The stock had been pummeled early this month in an ugly market where it posted disappointing earnings. But the decline was undeserved and AVGO is considerably higher over the past week. The AI part of the business, where the future growth is, was even better than expected. The flat parts of the business are cyclical and will likely bounce back in the quarters ahead. The AI trade is languishing now, but it certainly isn’t dead. Lost time can be made up very quickly in this arena. BUY

Cheniere Energy, Inc. (LNG – yield 0.9%) – This natural gas exporter took a hit early in September as the market reeled and the energy sector struggled. But it has bounced back nicely over the last week. Natural gas prices have also been falling. But that isn’t necessarily a bad thing as the spread between U.S. and overseas prices remains high. The world still needs U.S. natural gas. Although the price can bounce around with gas prices in the near term, NGL exports continue to grow. BUY

Constellation Energy Corporation (CEG – yield 0.7%) – What a recovery! This nuclear power provider took a beating the first week after Labor Day, down 12% in the four trading days. But CEG has since recovered all that loss and then some and is higher for the month of September. There was no specific reason for the early September selling except that CEG is a much more aggressive unregulated utility that returned 35% YTD and is also related to technology, as it should be a primary beneficiary of increased electricity demand from AI. I suppose the combination of strong performance and association with AI caused the drop. But Constellation should be a high-growth electricity producer, positioned in the wheelhouse of growing electricity demand. BUY

Digital Realty Trust, Inc. (DLR – yield 3.0%) – The data center REIT pulled back along with the technology sector after mid-July. But it has moved 8.7% higher in just the last week and a half and is now back to the highest level since early July. 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%) – The pharma superstar stock pulled back from the high this month for a dumb reason. Novo Nordisk A/S (NVO) is experiencing supply shortages for its weight loss drug. Ozempic is the biggest competitor for Lilly’s new weight loss drug, and there is fear that Lilly may have supply problems too. But Lilly is reporting an easing of supply constraints. Novo had supply problems last quarter and Lilly didn’t. There’s no reason to assume these problems will apply to Lilly. Plus, competitor stumbles are a good thing. It’s also a good thing when a drug is in such demand the main challenge is making enough of it. BUY

McKesson Corporation (MCK – yield 0.5%) – Unfortunately, the Novo supply issues mentioned above are a bigger problem for this pharmaceutical supply chain company. Earnings disappointed with lower-than-expected revenues last quarter, and the company cited weight-loss drug supplies that couldn’t keep up with demand as the main cause. The recent report indicates that it could be more of the same for McKesson in this quarter. The stock is down over 9% so far in September and 19% from the high. I’m not sure how this issue will get sorted out in the near term. But it’s a temporary problem and the longer-term prognosis for MCK is excellent. This is a good buying opportunity if you don’t already own the stock. BUY

Qualcomm Inc. (QCOM – yield 2.0%) – This semiconductor giant has certainly taken some lumps in recent months. It sold off in the first week of this month but has since recovered. But the stock is still down 28% from the high made in mid-June. Technology has been getting crushed in the recent market, and the AI trade has been losing a lot of its luster. AI could weaken further but the AI catalyst is not going away. Qualcomm is still very well positioned ahead of the next wave of AI, which should be in mobile devices. Analysts are forecasting a strong upgrade cycle for smartphones sometime next year and QCOM can easily make up for lost time when it gets hot. BUY

UnitedHealth Group Inc. (UNH – yield 1.4%) – The health insurance behemoth started the month off hot while the rest of the market was getting crushed. But as the market recovered UNH pulled back slightly. It seems to be a stock in higher demand when the market gets ugly because it’s defensive. UNH is a good hedge in case the market struggles and/or a recession becomes more likely. UnitedHealth beat earnings forecasts last quarter 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. It’s well positioned in a slowing economy as a highly defensive stock. BUY

Safe Income Tier

Alexandria Real Estate Equities, Inc. (ARE – yield 4.2%) – This recently underperforming life science property REIT has been much better lately. It’s up about 12% in the past month after hitting a 52-week low in mid-August. REITs have been the best-performing sector of the market over the last three months and the second-best-performing sector over the past month. ARE is just coming back to near the high point of its trading range over this year. Hopefully, it can surpass the $130 per share level and truly break out like many other REITs have. The defensive characteristics may serve ARE well going forward with the increasing recession fears. BUY

NextEra Energy (NEE – yield 2.6%) – NEE was upgraded to a “BUY” last week. It is another stock making new highs this month. NEE has predated the overall utility recovery and has been strong since March. It is a highly defensive utility, and the recession fears make NEE more desirable. There is also growth due to anticipation of a steep acceleration in electricity demand in the years ahead prompted by onshoring of manufacturing, electric vehicle growth, and increasing data center electricity demand because of AI. Renewable demand is expected to grow the most. BUY

USB Depository Shares (USB-PS – yield 5.1%) – Wow, fixed-income securities really love falling interest rates. 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. The position has returned over 31% now. 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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