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Stock Market Troubles & Antidotes

October 29, 2020

The US stock market is not off to a good start this Fall season.

The S&P 500 Index is currently down by 7.6% since September 2 to date, and that includes the bit of recovery in the earlier days of October.

S&P 500 Index Total Return—Source: Bloomberg Finance, L.P.

There are a few reasons for this.

The first is the elections next week, which were supposed to be more contested and fraught with challenged results. But that challenge is now subsiding.

Second, the more technology-weighted S&P has become highly valued based on price to earnings (P/E) and other metrics. That is true, but the stock market is not about current earnings, sales and business valuations. Rather, it’s about future developments.

The third is COVID-19, as virus case counts are rising around the US and Europe. Europe is in more trouble. Lockdowns are back, either partially or fully. This is having a genuine impact on prospective business revenues for its stock market indexes. Many are dominated not by technology but financials, which are not any sort of haven.

The US has several localized hotspots, but for now it is less likely to see draconian lockdowns. But all of the challenges are coming at the same time, dampening even some of the very good bits of news.

Current earnings reports are good. Positive surprises for sales and earnings are quite strong at about 3% for sales and 15% for earnings of all reported members so far. And some of the sectors of the S&P members are much better with 271 of the 505 reported.

We also got the GDP report for the third quarter, with a gain of 7.4%, which annualizes at 33.10%—well above expectations. And with expectations for the fourth quarter gaining 4%, the full year GDP for the US will likely show a decline of just 4%, which is remarkable given the severity of the virus and the lockdowns. This is much better than for most of the major economies of the globe.

Even weekly jobless claims dropped to 751,000 from 791,000, along with continuing claims down to 7.8 million from 8.5 million. And the Bloomberg Consumer Comfort Index came in at a good 46.3 level.

I am looking for more rational investing in the coming weeks on the improved economic data. But what should growth and income investors do both before the recent selloff as well as through any further negative reactions to challenges?

Essential Security

Essential services companies have been working and will keep working for dependable growth and income. Otherwise known as utilities, they may be considered by some to be boring, but they are only boring in dependable performance.

From September 2 to date, the S&P Utilities Index has returned a positive 6.4%. And this continues the positive return for the trailing year of 4.2% and a return of 74.3% for the trailing five years, equating to an annual average return of 11.7%. Even during the terrible fourth quarter for the S&P 500 Index in 2018, the utilities tracked by S&P were positive in return.

S&P Utilities Total Return—Source: Bloomberg Finance, L.P.

The entryway to great utilities is the Vanguard Utilities ETF (VPU), which is the synthetic means of owning the broad US utilities market, complete with its 2.6% yield. This is a good start. But we can do better.

Let me start with a favorite for some time, NextEra Energy (NEE). This is a Florida-based power utility that continues to expand in its non-regulated power generation around North America. It does this through ESG-focused (Environmental, Social & Governance) wind and solar, which has made it one of the largest by capacity in the world for green energy.

The stock has been soaring for years, and year to date it has returned 25.8%, or multiples of the S&P 500.

It just split its stock 4-for-1 to make it more accessible, and it makes for a great buy right now, ideally for a tax-free account, including its 1.9% yield, which keeps climbing in distribution by an average of 12.4% over the past five years.

Xcel Energy (XEL) is another power utility with core regulated business in the northern central part of the US. But it has the NextEra playbook, and it’s running it with surging wind and solar both for regulated and non-regulated markets. Yielding 2.4%, it has returned 14.7% year to date and has lots more to go. XEL is another essential buy, ideally for a tax-free account.

There is more to stock investing than just betting on the S&P 500. And getting to know more of the underlying stocks and sectors makes for better and safer returns, especially during broad selloffs.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life