This is a tough one. The overwhelming majority of the time the market goes up in the year following a down year. The S&P 500 is up over 9% YTD. That’s a better-than-20% annual pace. But there is a plethora of issues in the way of a further rally. That’s why there are currently only two BUY-rated stocks in the portfolio, one of which is NextEra Energy (NEE), notes Tom Hutchinson, editor of Cabot Income Advisor.
Much of the YTD return has to do with the strong performance of the large technology stocks that comprise more than 25% of the index. Nevertheless, stocks have climbed a wall of worry and shown impressive resilience so far.
Even if we get past this debt ceiling issue without consequence, there’s inflation and the Fed. The market seems to be pricing in Fed rate cuts before the end of the year. I disagree.
Core inflation is still high and isn’t budging. It’s unlikely the Fed will lower rates unless there is a recession, which is another thing. Most economists are forecasting a recession later this year or early next year. Stocks can take off before a recession ends when investors sense an economic bottom. But the market rarely performs well in a state of looming recession.
It’s also true that the S&P has already rallied 20% from the October lows. A bear market rally should be about out of gas. And it’s difficult to see how stocks can soar into the next bull market until there is more clarity on these issues.
That’s why the portfolio is not being as aggressive as I would normally like. It still makes sense at this point to only buy the defensive stocks that are below the targeted price as well as sell covered calls for income when a stock gets near the top of the recent range.
As for NEE, this combination regulated and clean energy utility stock has bounced around all over the past two years and is currently at the lower end of that range. It has been trending higher since the beginning of March as the risk of recession has grown and defensive stocks have outperformed.
But NEE is still more than 15% below the recent high. This company is targeting earnings per share growth of 6% to 8% annually through 2026 and 10% per year dividend growth through at least 2024. NEE is also well positioned as a defensive stock with growth in a highly uncertain market.
Recommended Action: Buy NEE.