I thought it would be a good time to take a precautionary view of portfolio management while the market is roaring higher off of the late December lows.
The S&P 500 shed 20% from Oct. 4 through Dec. 24 last year, covering a span of almost thee months only to see a raging snap-back rally restore 14% of the loss in just over three weeks. It is the most remarkable short-term rally I can remember in my three-plus decades of being a professional market participant.
At the nadir of the late 2018 sell-off, when the long-term five-year moving average of 2,350 was put to the test, I was scanning my screens as to which sectors and stocks were maintaining their technical integrity.
I say technical because most blue-chip stocks worth their salt have a full measure of fundamental integrity, yet still are sold off just as heavily because investor sentiment has moved from concern, to fear, and finally to panic. Seeing as the S&P 500 is anticipating a trade deal with China, the Fed is done raising interest rates, the government shutdown won’t last beyond Feb. 1, a soft “Brexit” deal will be announced and global growth will stop slowing any further, it would seem fanciful to talk about the possibility of a stock market crash anytime soon. At the same time, the past three months have revealed a few stocks with attractive dividends that stood fast during the storm. Thus, they afford income investors something akin to a “lifeboat strategy.”
While cash now pays somewhere between 1%-2% and short-term treasuries pay about 2.5%-2.7%, it’s hard to make a budgetary go of it on such skinny yields. But owning stocks with qualified dividends where taxes are capped at 20% for those whose ordinary income is taxed at the max rate of 39.6% sure beats paying that same 39.6% rate on earned interest from bonds.
If one can put together a portfolio of all-weather dividend-paying equities that throw off qualified income and pay yields above 3.0%, then this could be a viable plan that can be put in place in the event a market crash begins to unfold and everyone and their brother is running for the exits. Nothing is bullet-proof in a market crash except cash and very short-term treasuries. However, assuming the world isn’t coming to an end and only is about to slide into a hard landing type recession, here are some stocks to consider:
Procter & Gamble (PG) — current yield 3.14% — traded to a new all-time high in mid-December as the market was undergoing heavy selling pressure.
Duke Energy (DUK) — current yield 4.34% — traded to a new all-time high in mid-December as the market was approaching its low point during the correction.
Pfizer (PFE) — current yield 3.39% — traded back up to its 10-year high during the month of December to lead the drug sector.
Verizon (VZ) — current yield 4.23% — traded to a new all-time high in December on huge expectations of its 5G rollout.
Coca-Cola (KO) — current yield 3.28% — traded to a new all-time high in late November as the company shifted its long-term focus toward healthy beverages.
This is a not a creative list, but one that shows distinctly in the present time which mega-cap stocks did not get sold off. Instead, they were aggressively accumulated at a time when the baby was getting thrown out with the bath water. Since every market correction reveals those few names that emerge as the safest havens, for the foreseeable time, these five stocks represent the names to own if it looks like another trip back down to the December lows is in store, lest we see the market trade even lower.
Yes, a couple things have gone right for the market (dovish Fedspeak, etc.) and some other things are perceived to be moving in the right direction. However, if Murphy’s Law has anything to do with it, the year ahead still holds a high degree of “risk-off” potential. One need not run for the exits if there is trouble on the horizon, but simply have a “lifeboat strategy” in place for which to rotate to.
Consider my high-yield income advisory Cash Machine as a service to have at the ready if and when the markets shift. I’ll be recommending not just the five stocks noted, but also a full portfolio of all-weather assets to shelter great dividend yields from any market storm. Go to Cash Machine by clicking here and put in place a plan of action for good and bad weather income investing.