U.S. equity markets bounced back from Monday's losses as investors bid all sectors higher, choosing to look past the uncertainty around the important senatorial elections in Georgia and the lockdown measures imposed in the U.K. as the virus surges throughout Europe. Oil prices finally topped $50 per barrel for the first time since February, driving the shares of oil producers and drillers higher for the day.

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The recovery trade was back in style as investors bid up travel and industrial stocks, but they weren't too picky today as gainers far outpaced losers. Investors are starting to notice a pick up in long-term interest rates, and the 10-year U.S. Treasury yield is inching closer to 1% for the first time since February. Like it or not, economic growth comes with higher real interest rates even if the Fed is holding down the federal funds rate for a few more years. 

This will be just one of several challenges facing equity investors who are looking for another year like the past two in terms of returns. It's good news for savers and fixed income investors, but the lure of equities, especially those that offer juicy dividends, is strong.  

Good looking tape today, from our friends at FinViz:

share price chart
Chart courtesy FinViz.

The New Dogs of the Dow

We know that many of our readers are dividend lovers — and for good reason. Why not get a reward for being a shareholder in addition to any upside gains the stock might enjoy while its in your portfolio? For years, owning the so-called Dogs of the Dow, which are the 10 highest yielding stocks in the Dow Jones Industrial Average on an equal-weighted basis, delivered solid overall returns. 

But the last two years have exhausted the poor pups, and returns have dragged.

2019 and 2020 marked the two worst years for the Dogs relative to the S&P 500 going back to 2001. The Dogs underperformed the benchmark index in 2020 with a -8% total return versus 18.4% for the S&P 500. Six of the 10 Dogs of the Dow had negative returns. Chemicals company Dow Inc. (DOW) was best in show with a return of 8%, which means that none of the Dogs beat the S&P 500 last year. In 2019, the Dogs of the Dow had a total return of 19.7% versus 31.5% for the S&P 500. 19.7% is great — but not when the overall market is more than 50% higher. 

The good news for dog lovers is that the Dogs of the Dow rebalance annually on Dec. 31, so dividend lovers have some new puppies to choose from. Here are the 2021 Dogs of the Dow:

Dogs of the Dow
Chart courtesy BofA Research.

Oil Tops $50/Barrel for First Time Since February

A surprise production cut by Saudi Arabia of one million barrels of oil per day helped boost crude oil prices above $50 per barrel for the first time since before the pandemic was declared. In addition, OPEC and its oil-producing allies, known as OPEC+, agreed to hold output largely steady in February. Saudi Arabia’s voluntary cuts will offset production increases from Russia and Kazakhstan, which announced they will add a combined 75,000 barrels per day to the market in both February and March. 

Still, oil prices remain below pre-pandemic levels. West Texas Intermediate (WTI crude) closed out 2020 around $48.50 per barrel, a 20.54% loss for the year. At the beginning of 2020, WTI traded above $63 per barrel. 

Oil Prices and Balanced Budgets

2020 devastated the economies of Middle Eastern oil producing nations. Many of them require high oil prices to maintain balanced budgets, and the difference between the cost to produce a barrel of oil and the fiscal breakeven price at which they need to sell it has been permanently disrupted. According to OilandGas360, even though a country like Saudi Arabia has one of the lowest oil production costs, its fiscal breakeven price is much higher since it needs approximately $83.60 oil for a balanced budget. Saudi Arabia lost tens of billions of dollars in oil revenue and royalties in 2020, and the International Monetary Fund (IMF) estimates the Saudi economy fell by 6.8% last year. $50 oil doesn't help the kingdom, or many other oil producing nations, that much.

I Hear a Train a Coming...

Regular readers know of my obsession with cargo and its usefulness as an economic indicator. I am a Dow theorist at heart, and when transports are moving, the recovery is real. In the fourth quarter of 2020, rail carloads finally turned positive and will have posted the first positive quarter of carload volumes since 4Q'18. Don't forget, the trade war with China was already slowing down exports and cargo loads before the pandemic through the economy off the rails.  

According to BofA Research, roughly one-third of rail revenues were driven by retail (consumer) shipments, one-third via industrial products (chemicals, metals, minerals, forest products, etc.), and one-third weather/bulk-related (coal/grain).  

Rail carloads
Chart courtesy BofA Research.