Just when it seemed like the investment community was buying into the “V-shaped” recovery, due to the mother-of-all-snapback-rallies, investors took profits after digesting the earnings reports of heavy-weight stocks. Last week was the culmination of a “buy the rumor, sell the news” tape with the “Sell in May and go away” mantra starting to make the rounds.
It would seem that investors can throw out the traditional playbook in the current environment, as there is no fiercer force at work than the almighty Federal Reserve, which has pledged to print whatever it takes to bring the American economy to a full recovery. Fed Chair Jerome Powell spoke with great conviction at last week’s FOMC meeting, when he said there are no limits to how far he will go to help the economy.
As further proof of the Fed’s resolve, their April 30 changes to the Main Street Lending Program – the program which encourages banks to loan directly to small- and mid-sized corporations – will now also be available to some larger businesses. The central bank will also lower the program’s minimum loan requirement from $1 million to $500,000, Powell noted. The Fed will purchase 95% of each bank loan.
The Fed’s actions are historic, and the speed of their action is unprecedented. Jerome Powell is clearly the right man to lead the Fed at this time. In a bid to offset the economic damage from the coronavirus, the Fed has slashed its benchmark interest rate to near zero and launched a variety of programs that total more than $2.3 trillion, aiming to get money to households and businesses in need.
“We can do what we can do, and we will do it to the absolute limit of those powers,” Powell promised.
This massive fiscal cannon fire helped to fuel the recent rally, as most of the gains were realized before first-quarter earnings season got into full swing. The “don’t fight the Fed” short-squeeze was also in full bloom and there was no place for the shorts to hide, not even in the energy sector and small caps, where the pain of the economic shutdown was most felt. And then the reality of a “U-shaped” recovery set in …
The bond market was having nothing to do with any “V-shaped recovery” happy talk. The yield on the 10-year Treasury closed out last week at 0.64%, just 10 basis points above the March 9 low of 0.54%. You’d think after a 760-point rally in the S&P 500, we would see a little more giveback in bond yields.
Not so, not with crude oil trading at a price that will deconstruct most of the progress made in the oil industry, and with new unemployment claims topping 30 million over the last six weeks. For now, wage increases at all levels of the economy are a thing of the past, and there is widespread agreement that the unemployment rate will be in the double-digits for many months, if not a full year or more.
Assuming the economy is on a path to a U-shaped recovery and interest rates and bond yields are down for the count, investors seeking income will have a second shot at buying highly defensive dividend stocks and best-of-breed dividend growth stocks in the coming weeks. While the Fed has provided a “put” under the market, that doesn’t mean the S&P can’t retest 2,600, where the long-term moving average sits.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The S&P penetrated this level on the way down as algorithmic sell programs created a trapdoor setting, where selling of index funds and ETFs triggered forced liquidation. As the Fed has now aggressively stepped in and stated their case of playing the role of Uncle Sugar for the market, a floor at 2,600 now looks more formidable and would involve a move down of only about 8% from Friday’s close.
This, in my view, is a very plausible scenario that will play out over the next several weeks and with it will come an excellent opportunity to buy into those dividend stocks that got away from bargain hunters in the most recent rally. I would emphasize that those seeking the highest yields should focus squarely on REITs, where yields compete with utilities but offer higher revenue and earnings growth.
Within the broader REIT space, the data center REITS rocketed off the late March lows, where four of the five publicly traded data center REITS traded to new all-time highs in the past two weeks. They include Digital Realty Trust (DLR), QTS Realty Trust (QTS), CoreSite Realty Trust (COR), CyrusOne Inc. (CONE), and Equinix Inc. (EQIX). (I have no position in any of these stocks).
Navellier & Associates does own Digital Realty Trust (DLR) but does not own QTS Realty Trust (QTS), CoreSite Realty Trust (COR), CyrusOne Inc. (CONE), and Equinix Inc. (EQIX) in managed accounts or our sub-advised mutual fund. Bryan Perry does not own Digital Realty Trust (DLR), QTS Realty Trust (QTS), CoreSite Realty Trust (COR), CyrusOne Inc. (CONE), and Equinix Inc. (EQIX) personally.
One of the good things about data center REITs is that their growth isn’t dependent on consumers spending money. There is also a compelling fundamental case for continued secular growth in data center REITS. According to DataCenter Knowledge, “The relentless growth of data and cloud computing, machine learning, Software-as-a-Service, content distribution, social media, ecommerce, and cloud-first or hybrid IT architecture for enterprise applications, combined with migration of applications from legacy corporate data centers. This attracts shareholders looking to participate in the long-term growth by owning digital infrastructure REITs like towers, fiber, and data centers.”
The global data center market is forecast to grow at a compound annual growth rate (CAGR) of over 17% during 2020-23, exceeding $62 billion, according to Data Center Colocation Market. The rise in adoption of multi-cloud and network upgrades to support 5G will be the main drivers.
Investments in 5G testing and deployment are driven by an increase in data traffic, owing to the rising adoption of IoT (Internet of Things) devices and big data analytics as well as the growing consumption of online video and audio content. This demand for multi-cloud strategy and the advent of 5G technology will lead to the rapid expansion of the global data center market.
To sum up, if we get a market “pause that refreshes,” where these overheated data center REIT stocks offer a meaningful pull back on share price, consider committing some income-oriented capital to this REIT subsector that is hitting on all 5G cylinders and should continue to do so for the next three years.