Surprisingly to Northlake, intermediate and long-term interest rates have fallen slightly over the last several months.  We had been anticipating higher rates as the economy emerged from COVID impacts, inflation held at well-above pre-pandemic levels, the timing of the Federal Reserve’s monetary policy tightening grew closer.  Instead, for reasons that most on Wall Street still do not understand, rates have fallen slightly.  Northlake still expects higher intermeidate to long-term interest rates over the coming quarters along with a partial re-steepening of the yield curve.

If we had to point to one reason for the recent dip in interest rates, it would be a quicker than anticipated fall in economic data and activity from peak post-COVID growth rates.  Given the virtual complete shutdown of the economy in 2Q20 and 3Q20, peak growth due to easy comps was always set to occur this summer.  Concerns about the impact of a pullback in stimulus and the possibility that spending had been pulled forward have been a steady source of debate.  The delta variant added another wrinkle as real-time data like OpenTable reservations and air travel appear to show a reaction.  The bond market seemed to anticipate weaker data which coupled with technical trading factors led to the surprising drop in interest rates.

Falling rates due to economic concerns did not hurt the overall stock market but investors rotated away from small and mid cap stocks, value stocks, and stocks of companies sensitive to the reopening of the economy.  Bond investors cheered, however.  Returns on major bond indices like the Barclays Aggregate have been positive for the past four months and bonds overall have about recouped the losses from 1Q21.  Year-to-date, bonds have produced no return.  Lower rates have helped Northlake’s preferred stock investments in Qurate Retail (QRTEP) and Liberty Broadband (LBDRP) since preferred stocks share very similar characteristics to bonds despite having “stocks” attached to their name.

The impact of interest rates on high-yielding stocks is normally quite straightforward.  Lower rates make the high dividends more valuable, while the opposite is true when rates rise.  Over the past few months, the relationships have not held.  Many high-dividend stocks are considered value stocks, including many that are also sensitive to the economic reopening.  Thus, stocks that Northlake favors with high dividends such as VICI Properties (VICI) or the iShares Select Dividend ETF (DVY) have slipped slightly off their highs since they have been lumped into the rotation trade that strongly favored growth stocks.  Verizon Communications (VZ) has also slipped from its spring highs.  Our best performing dividend stock has been Lamar Advertising (LAMR).  LAMR sits very near its all-time high as strength in advertising across all media has led to exceptional financial results and higher forward estimates.

We added AT&T (T) to client portfolios in late July.  AT&T is a total return play.  The dividend yield is presently 7% and we think the stock is undervalued based on operating fundamentals as management has aggressively shifted strategy to focus on the core communication services.  AT&T shares are sensitive to trends impacting high-dividend stocks.

There was big news at VICI a few weeks ago.  The company announced a takeover of peer casino gaming REIT MGM Properties.  We think this is a great transaction for VICI shareholders.  It is accretive to earnings which means the dividend should be going up faster than expected.  In addition, VICI shares are likely to be added to many REIT-focused funds due to the massive scale of the newly enlarged company.

AGG, LBRDP, QRTEP, VICI, LAMR, T, VZ, and DVY are held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.