Oil steals the show — again. Ever since the final week in December, equity investors have been scratching their heads over a string of mediocre purchasing managers’ reports (from Europe, China and the U.S.).
Could these surveys be pointing to a meaningful slowdown in the global economy? Quite possibly. But the biggest worry, by far, is the continued relentless decline in oil prices.
At today’s Nymex settlement, the February crude contract stood at $47.93 a barrel, down a whopping 55% from last June’s peak. While a glut of oil certainly explains a large part of the drop, demand has also softened a bit.
Stock traders, quick to draw the direst conclusions from oil’s slide, today knocked down the S&P 500 to a three-week closing low. On the bond side of the Street, the benchmark 10-year Treasury yield — again reflecting fears of economic weakness — fell as low as 1.89%, its lowest reading since May 2013.
It would be foolish for us to dismiss these concerns out of hand. The world is struggling with a multitude of economic imbalances, mostly tied to the fact that too much debt is supporting too much unproductive activity.
However, I’m reminded of 1985 – 1986, when Saudi Arabia last decided to let oil prices plunge (in order to cure another temporary oversupply). Some unnerving stock market volatility resulted, along with some serious damage to companies and communities that depended heavily on oil revenues.
Still, the world economy held together. By mid-1987, the headline U.S. stock indexes had rocketed far above the level they had achieved before the oil-price collapse.
We don’t yet know the outcome this time, of course. So, we remain diversified. Our utilities, real estate investment trusts, consumer-staples stocks and preferreds are doing fabulous jobs of resisting the undertow from oil. (PG&E Corporation (PCG) and UDR, Inc. (UDR) touched all-time highs today, while Realty Income Corp (O) and Ventas, Inc. (VTR) notched 52-week highs!)
Diversification gives us the freedom to nibble at beaten-down bargains as they come our way. In the energy sector, pipeline giant Enterprise Products Partners L.P. (EPD) just boosted its cash distribution for the 42nd quarter in a row — a sign that management doesn’t see any major disruption (yet) to its business plans from the oil rout.
EPD stock’s current yield is 4.4%, mostly tax-deferred, and you should buy Enterprise Products Partners. From here, I’m projecting a total return of 20% or more in the coming year for EPD stock. Note that, because of special tax rules that apply to master limited partnerships, you should hold EPD in a taxable account (not an IRA).
Outside the energy orbit, I remain keen on HSBC Holdings plc (ADR)(HSBC), Britain’s largest bank. HSBC is yielding a handsome 5.4%, based on the past four quarters’ dividends. What’s more, I expect a modest increase with the April payment.
I’m steadily building a large position in HSBC for my personal pension fund. Someday, when today’s global financial turmoil is a distant memory, I expect that HSBC stock will be paying for my groceries and fuel and leisure pursuits in retirement.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won nine Best Financial Advisory awards from the Specialized Information Publishers Foundation.