What’s the Plan for the Second Half of the Year?

Kelly Green
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July 3, 2024
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Last week we had our quarterly live call for Yield Shark subscribers. We had some great conversations over the course of the hour. One of the major topics that came up was what will happen through the end of the year. Will we see a correction or a rotation? If so, when will this happen? And most important, how can we prepare?

The S&P 500 climbed 15% in the first half of the year. The tech-heavy Nasdaq added 20%. And the Dow Jones Industrial Average (DJIA) managed to eke out a 3.7% gain.

There’s a lot of chatter across the financial channels about where we’re headed. Words such as correction, recession, and crisis are being thrown around. A Barron’s headline declared:

Source: Barron’s

But Investor’s Business Daily is still bullish:

Source: Investor’s Business Daily

There are plenty of worries that will weigh on the markets through the end of the year. We’re still waiting for the Fed’s “inevitable” interest rate cut. Analysts and journalists are chomping at the bit to put a number and a date on that event. And it’s an election year. Exactly who will be running is up for debate after last week’s presidential debate.

In John Mauldin’s Thoughts from the Frontline two weeks ago, he noted:

People keep asking me, “When is the crisis you’re predicting going to happen?” I think the answer is December 19, 2029. (Please note, sarcastic humor and not a forecast.)

John is talking about a debt-driven economic crisis. Mathematically, it seems certain we’re on a trajectory toward one over some period of time. I don’t think it will be in the next six months, but I do think we will see a market correction or a rotation.

What Should We Look For?

I view a market correction as something that happens across the board. It’s where investors sell to limit their exposure to everything—think March 2020. I’m not convinced that is the next phase of the market.

Instead, I think we’re going to see investors rotate out of certain stocks and sectors and into others.

Investors will start to take gains on their tech stocks. The money will be repositioned in more defensive players such as utilities and consumer staples. No matter what’s going on in the economy, we will still use electricity and water and buy toilet paper and groceries.

Many of these defensive stocks had a run-up in 2021 into 2022, but have been stagnant since. Investors moved money out of these companies and into CDs or high-yield savings accounts. Income investors were no different.

We took a different route. We didn’t want to sacrifice the wealth-building power of dividend reinvesting and compounding. But the allure of a safe 5% yield was too strong for many people.

Income investors will return to dividend stocks if the Fed cuts interest rates. When the rates on CDs and savings accounts start to fall, then it’s back to stable dividend payers. Another reason we could see this rotation in the back half of the year—uncertainty.

Two companies I recommend that fit this scenario are Lyondell Bassell (LYB) and Enterprise Products Partners (EPD).

LYB is a giant in plastics recycling and resin production, both are integral for the future. Likewise, energy makes the world go round, and EPD is our oil exposure.

Stick With the Plan

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My dividend strategy is grounded in two financial goals: build wealth for tomorrow and generate more income today. To hit both goals, I group dividend stocks into two baskets: Bedrock Income and Current Yield.

We build wealth with our Bedrock Income stocks. These are stocks you could hold for years or even decades. And you can reinvest the dividends to compound the wealth-building effect.

Current Yield stocks generate more income now. I target higher yields with these stocks and expect to hold them for only a year or two.

I don’t give recommended portfolio weightings to any stocks. Each investor must adapt their holdings to meet specific needs. If you don’t need income right now, favor wealth-building stocks and reinvest the dividends. If you need more income favor Current Yield stocks.

Use this strategy to create the best portfolio for you.

Occasionally, when the timing looks right, we use special situation stocks to juice our income or speculate on a catalyst that will lift the share price. Right now, we have one stock that is a speculation on the election, regardless of who wins. We stand to lock in bonus capital gains from political ad spending on top of our dividends.

No matter what happens in the markets, both defensive and income-boosting dividend stocks should be part of your portfolio.

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