The market was already struggling after the Fed’s “higher for longer” comment about interest rates. Now it’s getting hit with ugly headlines regarding the situation in Israel. But AbbVie (ABBV) is a cutting-edge biopharmaceutical company stock that’s getting through this challenging year in decent shape, highlights Tom Hutchinson, editor of Cabot Income Advisor.
Geopolitical risks are always out there, and they act up occasionally. Hopefully, this new Middle East situation won’t expand into a wider conflict.
There is also the Ukraine conflict. These are risks that could develop into a much bigger problem. Even if they don’t, there is still the interest rate and inflation situation. Interest rates are now at the highest level in more than 16 years.
The average 30-year mortgage rate is now well over 7%. Lending rates across the board are higher than they’ve been in a decade and a half. That makes all things that people borrow money to buy less affordable, and demand will inevitably drop. Consumption is 70% of GDP.
The market doesn’t like these high rates, either. They pressure the valuation of growth stocks, including the technology sector which is the largest and has driven the market for the last decade and a half. Defensive dividend stocks are also under pressure as fixed rate alternatives become more attractive.
But this economy has proven to be resilient. Stocks have still rallied 12% higher YTD. The market tends to be very surprising and you can’t write off good performance in the months ahead.
My approach will continue to be to act cautiously under the circumstances by using strength in individual positions to sell high-priced covered calls and get high income. Eventually, the market will turn around. It always does.
As for ABBV, it has returned -5% YTD. But it has been a lot better over the last two months when it has been up over 9%. Healthcare is a good sector to be in when the overall market struggles.
Shrinking Humira revenues should be overcome with its strong new drugs and pipeline in the future. The recent solid earnings report emboldens the notion that the revenue drop from the Humira patent expiration will be temporary and AbbVie will turn the corner before long.
Recommended Action: Buy ABBV.
