Many bears who believe we’re already in an economic recession may be proven incorrect, given the resilience of this economy. Indeed, we’re in a “bad news is good news” environment, with solid job numbers in the states causing markets to swing to the downside. With a mild recession partially baked into the stock markets in the first half of 2022, it seems like any deviations from expectations are met with a bit more volatility.
Now, the job report was a good thing that bodes well for the economy’s health through this tightening cycle.
That said, the U.S. Federal Reserve (the Fed) and Bank of Canada (BoC) may need to get more aggressive with their rate hikes to curb inflation. Undoubtedly, the recent relief rally was induced by the hope that the Fed would take a somewhat more dovish pivot, with fewer rate hikes needed to bring inflation back down.
With the economy showing signs that it can perhaps take a few more than expected rate hikes to the chin, I don’t expect central banks will lighten up anytime soon. Indeed, market chatter about rate cuts may prove premature. Rates on the 10-year U.S. Treasury note have fallen well below 3% in recent weeks in anticipation of a less hawkish push from the Federal Reserve in its fight against inflation.
Inflation may have peaked, but central banks need to drive it down quickly
Undoubtedly, commodity prices have decreased significantly over the past few months. WTI plunged below US$89 per barrel over the weekend, and U.S. president Joe Biden’s Inflation Reduction Act could help further reduce energy costs over the long run.
Still, investors shouldn’t expect weakening commodity prices or fiscal policy to take the place of rate hikes. The Fed and BoC know the dangers of letting inflation run too hot for too long. Though recent moves in commodity markets point to peak inflation, the Fed knows it’s better than err on the side of caution to avoid a repeat of the 1970s type of stagflationary environment.
Peak inflation is only half the battle. The other half will see central banks try to drag it down as quickly as possible without causing too much pain to the red-hot economy.
In any case, it’s unlikely that the rest of the 2020s will mirror the 1970s. However, I think it’s still prudent to be ready for more rough weather. In this piece, we’ll look at an all-weather dividend stock that can have your back when the going gets rough.
Fortis (TSX:FTS)(NYSE:FTS) is a utility stock perfect for investors looking to do well in almost any environment. All-weather stocks tend to be less sensitive to the state of the market cycle. With an incredibly low 0.14 beta (a gauge of share price volatility, where below one means it’s less volatile than broader markets) and a bountiful 3.6% dividend yield, Fortis stock is certainly a sleep-easy stock for investors through these trying times.
As central banks balance on a tightrope, investors in Fortis won’t need to be as on edge, given Fortis’s stable operating cash flow stream and growth profile, which isn’t subject to drastic downside surprises when economic conditions get rougher. It’s Fortis’s low-risk businesses that give it such a high “quality” of earnings. As stable as its regulated operations are, it’s worth noting that the Canadian utility scene isn’t best known for huge returns.
Fortunately, Fortis has been steadily acquiring its way into the more lucrative U.S. market over the years. ITC Holdings, Fortis’s American utility business, is a foundation for further growth south of the border. Indeed, regulatory hurdles can pop up, as Fortis looks to grow its U.S. presence. In any case, management has done a marvelous job of leaping past such hurdles.
Fortis expects its $20 billion investment plan to drive base and dividend growth of around 6% through 2026. Such growth is unlikely to be derailed by a rate-induced period of economic slowness.
The stock trades at 22.6 times price-to-earnings, which is well below the utility industry average of 30.2. The dividend yield is also 0.1-0.2% higher than industry averages.