Looking For Value

DJIA: 52-wk: +14.59%, YTD: +13.67%, Wkly: -2.25%

S&P 500: 52-wk: +24.74%, YTD: +24.34%, Wkly: -1.99%

NASDAQ: 52-wk: +30.55%, YTD: +30.39%, Wkly: -1.78%

Invesco S&P 500 Pure Value ETF: 52-wk: +10.16%, YTD: +9.89%, Wkly: -3.13%

During the week of December 16–20, 2024, U.S. stock markets experienced mixed performance amid significant economic developments.

Equity Markets:

• S&P 500 Index: The S&P 500 declined by approximately 0.6% over the week, snapping a three-week streak of gains. Horizon Investments.

• Dow Jones Industrial Average: The Dow fell by about 2%, marking its tenth consecutive negative trading day on Wednesday—the longest such streak since 1974. JH Investments.

• NASDAQ Composite Index: In contrast, the NASDAQ rose slightly, supported by strong performances in the mega-cap growth sector, notably Broadcom (AVGO). Horizon Investments.

Economic Indicators:

• Inflation Data: The Consumer Price Index (CPI) release aligned with consensus estimates, indicating stable inflation levels. Horizon Investments.

• Federal Reserve Policy: The Federal Reserve implemented a widely anticipated 25 basis point rate cut. However, it signaled a more hawkish stance by projecting fewer rate cuts in 2025 than previously expected, which contributed to market volatility. JH Investments.

Bond Markets:

• Treasury Yields: The bond market saw a steepening of the Treasury yield curve, with the 10-year yield increasing by more than 20 basis points, reaching approximately 4.53% by week's end. JH Investments.

Commodities:

• Gold Prices: Gold experienced one of its steepest single-day drops of the year during this week, reflecting broader market volatility. Yahoo Finance.

Overall, the week was characterized by investor reactions to central bank policies and economic data releases, leading to varied performances across different market sectors.

Eight municipal-bond funds with strong yields and prospects.

Fund/Ticker: iShares iBonds Dec 2028 Term Muni Bond / IBMQ
SEC Yield: 2.6%
Expense Ratio: 0.18%

Fund/Ticker: Vanguard Tax-Exempt Bond/VTEB
SEC Yield: 3.4
Expense Ratio: 0.05

Fund/Ticker: Capital Group Short Duration Municipal Income / CGSM
SEC Yield: 3.1
Expense Ratio: 0.25

Fund/Ticker: T. Rowe Price California Tax-Free Bond/TCFEX
SEC Yield: 3.5
Expense Ratio: 0.44

Fund/Ticker: Pimco New York Municipal Bond/PNYIX
SEC Yield: 3.3
Expense Ratio: 0.45

Fund/Ticker: Nuveen High Yield Municipal Bond / NHMAX
SEC Yield: 4.5
Expense Ratio: 0.79

Fund/Ticker: VanEck High Yield Muni / HYD
SEC Yield: 4.2
Expense Ratio: 0.32

Fund/Ticker: iShares High Yield Muni Income Active/HYMU
SEC Yield: 4.3
Expense Ratio: 0.35

Sources: Morningstar, Company reports.

Dan Close, head of municipal strategies at Nuveen and portfolio manager of the $15.8 billion Nuveen High Yield Municipal Bond fund, says recent tax-collections data show that municipal governments are in good shape. State and local tax collections for property, individual income, and sales taxes are better than expected; additionally, there’s more than $400 billion in reserve funds across municipal government balance sheets, four times higher than prepandemic levels.

Given the run-up in equities valuations, munis could be a good opportunity to diversify while interest rates remain high.

Malloy suggests that corporate earnings could falter if the economy slows because the Federal Reserve remains too restrictive with monetary policy. That means munis can play their traditional fixed-income role as a ballast against equity declines. “There is no permanent business cycle, and it will turn. In the meantime, you have these high yields to pick up income,” he says. Munis have historically outperformed during recessions.

Close reiterates that municipalities’ healthy reserves may help them out if there is an economic slowdown.

Another benefit to munis right now is that unlike other fixed-income investments, the muni-bond yield curve has an upward slope, so it makes sense to extend duration. “We’re getting paid to lend money for longer periods of time,” Close says. Duration is a measure of interest-rate risk tied to a bond’s or bond fund’s maturity, yield, and other factors. Longer-duration bond funds will see prices rise if interest rates fall. Generally, for every one-percentage-point drop, a bond fund will see its price rise by an amount equal to its duration. There is still time for investors who have been sitting on cash tucked in high-yield savings accounts to put money to work. Close says a strong economy may steady the Fed’s hand with rate cuts. Nuveen’s outlook is for a terminal federal-funds rate of 3.75%, with the 10-year U.S. Treasury note to hold around 4.5%.

For an index-based, high-credit-quality, national muni ETF, the $35.9 billion Vanguard Tax-Exempt Bond ETF has an average AA rating and is a Morningstar gold medalist. There are also several actively managed, state-specific muni funds, including the $808 million Morningstar gold medalist T. Rowe Price California Tax-Free Bond and the $838 million Morningstar bronze medalist Pimco New York Municipal Bond.

Uncertainty surrounding the viability of the 2017 Tax Cuts and Jobs Act has some high-income investors looking more closely at high-yield muni bonds as a strategic investment opportunity, says Derek Miser, investment advisor and CEO at Miser Wealth Partners. If the TCJA expires in 2025, the top federal income-tax rate will revert to 39.6% from the current 37%, increasing the tax burden on high-income earners.

“High-yield munis are especially compelling right now due to their attractive taxequivalent yields,” Miser says, noting there’s the potential for higher total return— price appreciation and yield—for buyers of longer-duration muni bond funds if rates fall.

For investors seeking diversified funds with longer duration, Miser points to an index fund, the $3.3 billion VanEck High Yield Muni ETF, with an effective duration of 6.5 years; and an actively managed ETF, the $244 million iShares High Yield Muni Income Bond, which has an effective duration of 7.16 years.

Conversely, some financial advisors wonder if munis will underperform if the tax cuts are made permanent, says Mark Marinella, portfolio manager of the $542 million Capital Group Short Duration Municipal Income ETF. He says there’s no real correlation between tax rates and munis, though in the two years after the act’s initial passage, munis outperformed Treasuries.

Instead of worrying about tax policy, Marinella says muni investors should focus on the criteria important to the market: inflows, the state of the economy, and fundamental credit risk. All three look positive for 2025, he says.

Stock performance for the consumer-staples sector has been mixed this year.

Nevertheless, there’s no shortage of stocks with attractive yields and secure dividend growth, such as Procter & Gamble and Colgate-Palmolive.

Stephanie Link, chief investment strategist at Hightower Advisors, cautions investors to be selective. “There are a couple of winners,” she says. But “for the most part, a lot of them are lagging.”

That’s because of various negative factors. They include pricing pressure after several years of companies putting through big increases, ongoing worries about the ramifications of weight-loss drugs, and more-recent concerns about what impact Robert F. Kennedy Jr. could have on ingredients allowed in various food products if he’s confirmed to oversee the Department of Health and Human Services. There’s also the specter of more tariffs after President-elect Donald Trump takes office next month.

On top of that, the sector has fallen in favor as many investors flocked to sectors with more growth, like technology. Consumer-staples stocks have trailed this year, returning about 19%, including dividends. That’s a good result on the face of it, but it lags behind the S&P 500 index’s 29% result.

Much of the sector’s performance this year, however, has been driven by a handful of largecap stocks that include Procter & Gamble, Walmart, Costco Wholesale, Philip Morris International, and Altria Group, observes Chris Senyek, chief investment strategist at Wolfe Research.

Many other stocks in the sector have also trailed the S&P 500. Kraft-Heinz is off about 10% this year, including dividends, and Conagra Brands is up about 3%.

Steady as She Grows

Consumer-staples stocks have had mixed results this year, but these dividends should keep getting bigger.

To some investors, that weak performance spells good opportunities for some dividend stocks.

“If you believe that Americans will keep eating despite GLP-1s [weight-loss drugs] and that RFK can only get so far in forcing America to curb caloric intake, then many of these stocks offer a compelling mix of valuation and dividend yield,” says Jenny Harrington, CEO and portfolio manager at Gilman Hill Asset Management.

She recently added Conagra to her equity income holdings. Shares of Conagra, whose brands include Duncan Hines, Birds Eye, and Slim Jim, recently yielded about 5%.

When Harrington purchased the stock, it was trading at an attractive valuation of about nine times what she expects the company to earn in 2025. She thinks that the dividend, currently at $1.40 a share annually, will grow at a 3% annual clip.

One of the company’s attributes, Harrington wrote in a recent letter to clients, is healthier food offerings, such as Udi’s gluten-free breads.

Senyek of Wolfe Research says that “from a dividend perspective, there’s some attractiveness within staples.”

He points out that the largest sector in the S&P 500 Dividend Aristocrats Index is consumer staples, at about 24%, slightly ahead of industrials. The constituents of this index, which include Clorox, Hormel Foods, and Kimberly-Clark, have paid out a higher dividend for at least 25 straight years —a mark of financial stability and consistency.

Senyek says that the Aristocrats are relatively cheap, recently trading at about a 10% discount to the S&P 500. He adds that the Aristocrats, compared with stocks with high yields, have outperformed following the first interest-rate cut in a cycle over six- and 12-month periods. The Federal Reserve’s first rate cut in this cycle occurred in September.

Even though the consumer-staples stocks in the S&P 500 have notched a collective doubledigit gain, that doesn’t tell the whole story. The sector consists of subgroups that include household products, food, beverages, and tobacco.

They each have different exposures to overhangs such as GLP-1 drugs, tariffs, and any push to ban more food ingredients.

U.S. household-product companies have performed the best in the staples sector this year because that group “is much more insulated from many of these issues,” says Filippo Falorni, lead analyst for beverage and household products companies at Citigroup.

Stocks on which Falorni has a Buy rating include Procter & Gamble, which yields 2.4%, and Colgate-Palmolive, at 2.1%. Both are members of the S&P 500 Dividend Aristocrats.

Beverage stocks have struggled lately, partly owing to concerns about higher tariffs after Trump takes office. Coca-Cola, for example, has returned about 10% this year, while PepsiCo is down by about 4%, dividends included.

Still, Falorni says the industry’s “dividend health is pretty high” and that “most of the companies’ balance sheets are in a really good place.”

Coca-Cola, for example, reported that in the quarter that ended on Sept. 30, its net debt to earnings before interest, taxes, depreciation and amortization, or Ebitda, was 1.7 times, below its target of two to 2.5 times.

While the stock isn’t that cheap—trading at about 21 times FactSet’s consensus 2025 profit estimate of nearly $3 a share—it’s showing respectable growth, says Hightower’s Link.

“Coke is actually probably one of the better positioned [companies] in terms of organic growth and in volumes,” she says.

The stock yields 3.1%.

Link argues that Target is even more undervalued. The retailer reported an earnings miss in November, causing the shares to drop by 22% on Nov. 20.

“The problems are fixable,” she says, adding that operating margins need to improve. In the fiscal third quarter, that metric came in at 4.6%, down by about 0.6 percentage point from a year earlier.

But Target has a reliable dividend, most recently $1.12 a share on a quarterly basis, for an annualized yield of 3.3%. The company has raised its dividend for 53 straight years, a reliable shock absorber when the stock runs into trouble and a nice extra when business is stronger.

Investors were whipped around pretty good last week. It may be a good idea to take a step back and see what 2025 may bring. The market may be heading to a bumpy end in 2024.

Factors this week I'm focusing on this week:

1) Follow through from Friday’s close.

2) Breadth of the market

3) Consumer Confidence Index for December on Monday

Happy Holidays to all.

Richie

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Data: Barron’s print edition page 23 12/23/24 Market Week Jacob Sonenshine

Paragraph: one Market Recap online 12/16/24- 12/20/24 ChatGPT As stated above

Paragraph: two Mitch on the Markets online edition 12/21/24 Could Dividend Stocks Make a Comeback in 2025 Mitch Zacks

Paragraph: three Barron’s print edition 12/23/24 page 18 Now’s the Time to Park Cash in Muni Funds. How to Play It. Debbie Carlson

Paragraph: four Barron’s print edition page 19 12/23/24 Coca-Cola and 5 other high-dividend consumer stocks Lawrence C. Strauss

Paragraph: Closing remarks, Richie Naso