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So Far, So Good for Dividends & Growth

March 07, 2019

The report card for key sectors of the stock market is telling of the flow of investment towards values now, with better prospects for the coming quarters. The S&P 500 Index is up 9.88%, or 10.32% with dividends. That’s good news—but it isn’t the best in the markets.

The better investment group is technology. As tracked by S&P, it’s up 12.75%. Add in the dividends, and the return is 13.15%.

This is the return of the story that I’ve been writing about inside Profitable Investing. More and more companies in this sector are embracing the move towards recurring income rather than unit sales. The poster child of the market continues to be Microsoft (MSFT). And this company remains on the forefront of reaching into new markets for more revenues—particularly leveraging its Azure cloud services.

Market Report Card: Total Return Year to Date for Select Market Sector IndexesSource Bloomberg Finance, L.P.

Next up is one of my favorite segments of the stock market, real estate investment trusts (REITs). The Bloomberg REITs Index is up 12.32%, or 12.81% with dividends, with more and more analysts and institutions catching onto the benefits of strong cash flows from still undervalued portfolios of properties in varied markets.

Even better are the higher yields that, thanks to the Tax Cuts & Jobs Act (TCJA), come with a 20% tax deduction on dividend distributions.

We hold a large collection of REITs across the model portfolios of Profitable Investing, but W.P. Carey (WPC) remains one of my long-term favorites.

Climbing further in the ranking is another of my favored market segments—the toll-takers of the petroleum market. Tracked by the Alerian MLP Infrastructure Index, these midstream players are up 11.80%. With dividends, the return is 14.06%.

The pipelines and related companies are flush with cashflows from oil- and gas-producers, and while there continue to be constraints in capacity, several of our holdings will be bringing additional capacity with expanded and new pipes coming on line this year.

This will bring even more cash to fund rising dividend distributions, which like the REITs, continue to be great tax-advantaged income buys. A favorite to look at in the Permian Basin is Plains GP Holdings (PAGP).

Further up the performance list, which will be a surprise for many, the regional banks are finally getting some love. The KBW Regional Banking Index is up 14.30%, or 14.87% with dividends.

I have been writing for more than a year now about how banks had been strangled to within inches of their lives by punitive regulatory laws and policies and how Congress, along with the administration, made several reforms that would bring banks back to business.

The market didn’t seem to want to pay attention. And part of that story was that with banks on the sidelines, non-traditional lenders were taking a bigger slice of business lending, along with talent, from banks. But now, we’ve gotten a series of quarterly reports demonstrating that they are finally getting better. Furthermore, this proves why you need to buy the banks for growth and income again. My favorite right now is Citizens Financial Group (CFG).

The relative laggard sector is the utilities, with a gain of only 7.78% as tracked by S&P, or 8.59% with dividends. But utilities are the dependable segment of the market for gradual growth and rising dividends. One of the better ones is NextEra Energy (NEE).

What’s Right?

The economy is growing. Gross domestic product (GDP) may slow in its ascent, but it’s still climbing. The compiled consensus by Bloomberg has growth for 2019 coming in at 2.50%. Moreover, the underlying components of the economy look to be in a sustained growth mode.

Consumers are projected to increase overall spending by 2.70%. Adding to the consumer picture of health is that job and wage gains are still robust.

Business spending and investment also continue to respond. Projections are for an increase of 3.60% for the year. And good old Uncle Sam never seems to be able to keep cash in his pockets, with projections for government spending rising again this year by 2.20%.

Inflation remains completely at bay. The core Personal Consumption Expenditure Index (PCE) remains below 2.00%, with compiled expectations showing that continuing through the year. This keeps the Federal Reserve Open Market Committee on the sidelines. It’s also likely the bond portfolio will remain more or less intact to keep the capital markets well supported. This should help corporate bonds, mortgages and municipals for the year.

In addition, there’s some added traction coming to the economy—particularly for areas of the economy that are lagging. Part of the TCJA included Opportunity Zones. These are locally identified urban and rural areas that need a further shot in the arm for development.

The TCJA provides tax incentives including deferred/eliminated capital gains taxes including the ability to rollover gains from stocks, bonds and other assets if the proceeds go to the Zones. Right now, there are 8,700 of the Zones with more expected. This could help to provide the next gear for the economy.

What’s Wrong?

That the economy’s silver lining… Now about the clouds.

Trade tariffs and negotiations—China is the big one that continues to weigh on day to day market optimism. I continue to stand on the belief that some deal will be reached, particularly as the 2020 election is now underway. The question is, how much of current market valuations are based on a good trade deal that may not materialize.

China isn’t alone in the trade issue. We still have to get the USMCA passed with Mexico and Canada. And Japan is on the horizon. Closer is Europe, with many European Union members at a disadvantage.

Trade brings in the other cloud—many of the major economies aren’t in growth mode. China is slowing, and consumers there are getting more interested in savings, made more cautious by interest rate cuts by the central bank. Europe remains at risk. Germany leads the risk, with the vulnerable auto sector and the banking market that never got fixed from the last crisis. Also, lesser credit nations, including Italy, will continue to weigh on the continent.

The US remains the island of prosperity, and while that’s good for our markets in the near term, it isn’t a sustainable long-term phenomenon.

Like I noted above, 2020 is getting closer, whether you want to hear about it or not. The election of 2016 brought the TCJA, regulatory reforms and other benefits for the economy. But not everyone is pleased. Businesses like stability so they can plan for the long term, and political uncertainty will weigh on strategic plans.

The big cloud, which is still there from the fourth quarter of last year, is earnings growth expectations for 2019. Compiled projections show further gains in the S&P 500 Index member revenues and earnings for 2019 and into 2020, albeit at lower growth rates than what we saw for 2018. This will impact valuations of companies that will be in the gunsights for the next round of earnings season in the coming months.

But I’ll continue to point to two forward-looking indicators that I’ve been watching. The Bloomberg Consumer Comfort Index (I refer to it as the Comfy Index) remains very positive, with the recent data showing a level of 59.60.

This continues to be very strong over the past two years and bodes well for the core majority of what drives the economy.

Comfy Index: Bloomberg Consumer Comfort IndexSource Bloomberg Finance, L.P.

In terms of business confidence, the Federal Reserve Bank of New York’s Business Leaders Survey for capital spending remains one of my go-to indicators for business investment. That index is up strongly for the start of the year at 26.60% and up 245.45% from the fourth quarter of 2016.

So, we have some clouds but also some silver linings showing for the start of 2019. But for now, I see more total return silver in REITs, utilities, big tech, petroleum pipelines and regional bank stocks.