In this latest installment of our newsletter, we share our observations of the markets and the economy in the first quarter of 2024. Click here to go to the full report on our website.  Following are the highlights:

• The stock market carried its strong momentum from late 2023 into the first quarter of 2024, driving most equity market indices to record highs. 
• The S&P 500 Index posted a 10.6% total return for the first quarter, its best first quarter since 2019.  The index peaked at 5,253 late in the quarter, a level which many analysts had predicted might not be reached until the end of 2024. 
• The stock market was bolstered by the combination of a resilient U.S. economy, solid corporate earnings, continued strong momentum in the tech sector, and a broadening of the rally into sectors like financial, energy, and industrials, which had been largely left behind in last year’s rally.
• The bond market reversed gains from the fourth quarter of 2023, posting a negative 0.8% total return in Q1 2024, as a slight increase in interest rates caused bond prices to fall. 
• The Federal Reserve held its benchmark Fed Funds rate steady at 5.25% – 5.5% during the first quarter, but benchmark Treasury yields began to tick higher in March, with the 10-year Treasury yield notching a year-to-date high of 4.3%, as expectations for significant rate cuts in the first half of 2024 began to fade.
• The Fed’s cautious stance on cutting rates early in 2024 came after two consecutive elevated inflation reports in January and February.  The Consumer Price Index, or CPI, rose 3.1% year-over-year in January and 3.2% in February, exceeding expectations.  Note:  The March CPI reading came out after quarter-end and also surprised to the upside, posting a 3.5% year-over-year increase. Core CPI, which excludes volatile food and energy prices, also remained elevated at 3.8% in March, matching its 3.8% reading in February.
• Absent a meaningful reversal in the core inflation rate to a level closer to the Fed’s target 2% rate, it seems likely that the Fed will remain cautious about cutting interest rates until at least the latter part of 2024.
• Overall, the U.S. economy has remained remarkably resilient, characterized by continued low unemployment, strong GDP growth, and solid corporate earnings.
  • The U.S. unemployment rate fell to 3.8% in March from 3.9% in February, remaining consistently in the sub-4% range as it has for the past 25 months. 
  • U.S. GDP grew at an annualized rate of 3.4% in the fourth quarter of 2023 and is currently projected to top 2.8% in the first quarter of 2024, according to the Atlanta Fed’s GDPNow tracker. 
  • Corporate earnings have also exceeded expectations, with fourth quarter S&P 500 Index earnings growing 4% quarter-over-quarter and 7% year-over-year.  Earnings are currently expected to accelerate 6.5% for the first quarter and increase 12.5% for the full year 2024, according to S&P Global. 
  • U.S. productivity has also showed gains, increasing 3.2% in the fourth quarter, significantly higher than the 1.5% average productivity increase over the past decade. 
  • Overall, these factors point to an economy that is making the “soft landing” that the Fed was hoping for, but which many were skeptical could be achieved.
• Our outlook for the economy and markets in 2024 remains cautiously optimistic.  We believe that if the economy continues to grow at a solid pace and corporate earnings continue to rise, then stocks should extend their gains this year. 
• There are numerous risks to the “soft landing” outlook, including the risk that the ongoing wars in Ukraine and the Middle East will spread into broader conflicts, and that geopolitical tensions with China continue to worsen.  Closer to home, the robust March jobs report heightened the risk that the Federal Reserve could further postpone interest rate cuts, which could dampen economic growth and derail the stock market.  In addition, continuing partisan gridlock on Capitol Hill and the 2024 election cycle also have the potential to disrupt markets in the short term.
• As far as valuation, the broad S&P 500 index can be considered fully valued at 21.8 times forward 12-month earnings, above its 5-year average of 18.8 times.  However, not all stocks or sectors are so fully valued, and we continue to look for and find pockets of opportunity, particularly in sectors which have lagged the overall market and are thus more attractively priced. 
• We expect value-oriented stocks, dividend-paying stocks, and other income-oriented securities to benefit from a broadening market rally and potentially lower interest rates in the future.  In the meantime, we still find short-term Treasury bills and money market funds attractive places to park cash at risk-free annualized yields above 5%.
• Overall, we maintain a positive long-term outlook for the U.S. economy and markets, and we believe our patient, disciplined approach to active security selection offers our clients strong long-term return potential in a cost effective and tax efficient manner

The Edgemoor Team

April 2024

In this latest installment of our newsletter, we share our observations of the markets and the economy in 2023 and our outlook for 2024. Click here to go to the full report on our website.  Following are the highlights:

• Investors found much to celebrate as 2023 came to a roaring close.  The market’s positive momentum accelerated in the fourth quarter, sending all major stock indices at or near record highs in December. 
• Bolstered by the combination of a solid economy, better-than-expected corporate earnings, and the anticipated end to the Federal Reserve’s long rate-tightening cycle, stocks rallied strongly in the 4th quarter to finish out the year on a high note.  It was a significant reversal of the pessimism many investors felt at the start of the year.
• The S&P 500 index posted an 11.7% total return for the fourth quarter – its best quarterly performance since late 2020 – and an impressive 26.3% total return for the year.
• The Bloomberg Barclay’s Aggregate Bond Index erased a modestly negative return for the first nine months of the year, rallying in the fourth quarter to post a positive 5.5% total return for the full year 2023, avoiding what could have been a third straight year of losses for bonds.
• Driving the late-year rally of both stocks and bonds was investor optimism that, in addition to ending rate hikes, the Fed may start to cut interest rates sooner than expected. 
• After maintaining a stance for months that investors should not expect rate cuts anytime soon, the Fed released new economic projections in mid-December that suggested the possibility of three rate cuts in 2024. 
• The primary rationale for the Fed’s pivot on rates has been the decline of inflation from its peak in June 2022.  Overall, inflation has cooled considerably from its peak of 9.1% in June of 2022 to a reading of 3.4% in December 2023.  If it continues its downward trend, it will support the narrative that the Fed should be able to “give back” some of its interest rate hikes sometime in 2024.
• The U.S. economy has remained remarkably resilient, particularly in the face of calls by many at the start of the year for an inevitable recession.  Instead, the U.S. economy has been characterized by continued low unemployment, strong GDP growth, and solid corporate earnings.
• Our outlook for the economy and markets in 2024 is cautiously optimistic.  If the economy continues to grow at a solid pace and corporate earnings continue to rise, then the stock market should rise further in 2024. 
• As far as valuation, the broad S&P 500 index is fairly valued at 19.3 times forward 12-month earnings, roughly in line with its 5-year average of 18.8 times.
• We have and will continue to find opportunities for our clients, particularly in sectors which have lagged the overall market and are thus attractively priced.  We expect value-oriented stocks, dividend-paying stocks, and other income-oriented securities, like utilities and REITs, to benefit from a broadening market rally and potentially lower interest rates in the future.
• In the meantime, we are still favoring short-term Treasury bonds and money market funds at better than 5% annualized yields for client cash.
• Overall, we maintain a positive long-term outlook for the U.S. economy and markets, and we believe our patient, disciplined approach to active security selection offers our clients strong long-term return potential in a cost effective and tax efficient manner.

The Edgemoor Team

In this latest installment of our newsletter, we share our observations of the markets and the economy in the third quarter of 2023. Click here to go to the full report on our website.  Following are the highlights:

• The S&P 500 index maintained a strong 13.1% total return through September 30th, 2023, despite recent market volatility.  The Bloomberg Barclay’s Aggregate Bond Index, on the other hand, has notched a modestly negative return of 1.2% year-to-date.
• In the third quarter, both indices posted negative total returns, reversing course following two quarters of gains. The S&P 500 posted a negative 3.3% total return in Q3, while the bond index returned negative 3.2% for the quarter.
• Much of the downturn in stocks and bonds came in September, with the S&P down 4.8% and the bond index down 2.5% for the month.  This was a rapid reversal for markets, even for the month that is historically the worst for equities.
• A major contributor to the market selloff in Q3 was the rapid rise in Treasury yields since mid-summer.  The benchmark 10-year Treasury bond reached its highest yield in nearly 16 years in late September, at nearly 4.6%.  This marked a dramatic increase from its yield of 3.75% at the end of June 2023. 
• The surge in Treasury yields came in reaction to the Federal Reserve’s latest statement that interest rates may need to stay higher for longer to bring inflation back to its target rate of 2%.  This resolve to quell inflation disappointed investors, who had hoped for a quick pivot by the Fed to cut rates in late 2023, after it paused rate hikes in June and September.
• Looking ahead into 2024, investors are currently expecting a half-point reduction in the fed funds rate by late next year, down from the one-point cut anticipated by many earlier in the summer. 
• The U.S. economy has remained remarkably resilient during the Fed’s rapid rate-hiking campaign over the last 18 months.  Bolstered by a still-robust labor market, solid consumer spending, and-better-than expected corporate earnings, the U.S. economy has so far averted the long-awaited recession that many had predicted for 2023.
• U.S. GDP growth – a key measure of the health of the overall economy – was a solid 2.1% in the second quarter ended June 30^th and is now predicted by the Atlanta Fed’s GDPNow model to top 3.5% for the third quarter. 
• The labor market also remains seemingly bulletproof.  U.S. businesses have added more than 200,000 jobs in each of the last three months, including September’s blow-out number of 336,000 new non-farm payrolls, a massive surprise to the upside from the consensus estimate of 170,000. 
• However, inflation remains elevated in the U.S., despite dropping significantly from its recent highpoint in June 2022.  The Consumer Price Index, or CPI, which is the broadest measure of inflation, held steady at 3.7% in September, but remained above July’s 3.3% rate for the second month in a row. 
• S&P 500 earnings are also projected to be flat year-over-year in Q3, after three straight quarters of declines for the index.
• Global growth has also faltered, with both China and the eurozone facing sputtering economies.
• Given all these uncertainties, our outlook for the economy and markets is mixed. We remain cautiously optimistic on equities but are concerned about the lack of corporate earnings growth this year. 
• Longer term, our outlook for earnings growth and the markets remains positive due to several structural tailwinds, including ongoing technological advancements, increasing worker productivity, widening consumer demand globally, as well as breakthroughs in the biotech and healthcare industries.
• In terms of portfolio implications, the market’srecent re-pricing in September and early October has presented some new pockets of opportunity, which we are actively evaluating. The write-up of Schwab in this report is an example of such an opportunity which we identified earlier this year.
• In the meantime, we are still favoring short-term Treasury bonds and money market funds at better than 5% annualized yields for client cash.

The Edgemoor Team

In this latest installment of our newsletter, we share our observations of the markets and the economy in the second quarter of 2023. Click here to go to the full report on our website.  Following are the highlights:

• Stock and bond markets continued their upward march in the second quarter ended on June 30, 2023, adding to gains posted in the first quarter and defying expectations by many for weaker market returns at the start of the year.
• The S&P 500 Index posted an 8.7% total return in Q2, putting the broad stock market index up 16.9% for the year-to-date period. The Bloomberg Barclay’s Aggregate Bond Index, which was slightly negative in the second quarter, is still up 2.1% so far this year.
• The strong performance of stocks sent the S&P 500 Index into a technical bull market, defined as a 20% rise off its October 2022 low, and marked the end of the bear market that began in January 2022.
• Overall, the U.S. economy remains steady, with the labor market strong, inflation easing, consumer confidence rising, and economic growth still positive.
• Employers added 209,000 jobs in June and the unemployment rate remained low at 3.6%. Inflation continued to ease in June, with the CPI up just 3% year-over-year, a significant slowdown from its high point of 9.1% in June of 2022. Consumer confidence jumped to a 17-month high in June, reflecting the slowdown in inflation and fewer worries about a recession. GDP growth is currently estimated to be 1.8% in the second quarter, down slightly from the revised 2% growth rate in the first quarter, but still positive.
• That said, some signs of slowdown are emerging. Jobless claims started to tick up in May, though they made an unexpected drop in mid-June. While the services sector continues to expand modestly, the manufacturing sector has remained in contractionary territory for eight consecutive months. And overall inflation remains above the Fed’s 2% target rate.
• The U.S. Federal Reserve held interest rates steady at its June meeting, maintaining its Fed funds policy target of 5.0% – 5.25% and putting its aggressive rate hikes over the last fifteen months on what some termed a “Hawkish Hold.” This means that despite the pause, the Fed expects stronger growth and persistent inflation in the months ahead, which will likely mean additional rate hikes before year-end.
• Looking ahead, the spotlight is now on corporate earnings and overall market liquidity as major factors in determining the course of the U.S. economy and markets in the second half of 2023.
• Given all these uncertainties, our outlook for the economy and markets is mixed.
• We remain cautious on equities in the near term, though our longer-term outlook is positive. The 12-month forward price/earnings ratio (P/E) for the S&P 500 Index is 19 times, which is above both the 5-year and the 10-year averages.
• In addition, this year’s equity market rally has been largely concentrated in just seven high-flying technology stocks, including many we own, namely Apple, Amazon, Microsoft, and Google. A narrow market like this tends not to have the longevity of a more broad-based rally, causing some concern for investors.
• And although aggressive rate hikes may be behind us, we expect to remain in a higher-for-longer interest rate environment until inflation cools and the labor market softens.
• We continue to look for and find some pockets of opportunity in today’s market (see our new investment write-up on Thermo-Fisher Scientific in the final section of this report). In addition, we continue to deploy uninvested cash in short-term Treasuries and money market funds at attractive, low risk, annualized yields at or above 5%.
• We believe that our patient, disciplined approach to active security selection gives our clients better long-term return potential in a cost effective and tax efficient manner.

The Edgemoor Team

In this latest installment of our newsletter, we share our observations of the markets and the economy in the first quarter of 2023. Click here to go to the full report on our website.  Following are the highlights:

•  Stock and bond markets proved far more resilient in the first quarter of 2023 than most investors expected, though it was not without considerable choppiness along the way.
• The S&P 500 Index posted a surprisingly strong 7.5% total return in the first quarter of 2023, while the tech-heavy Nasdaq saw an even better recovery from last year’s losses, returning 17% for the quarter, its best quarter since the second quarter of 2020.
• The Bloomberg Aggregate Bond Index also returned a positive 3.0% in the first quarter, as long-term interest rates declined, sending bond prices higher.  The yield on the 10-year Treasury note, which influences everything from mortgage rates to car loans, fell to 3.5% by quarter-end from 3.8% at the end of 2022.
• The shock to the banking system by the sudden collapse of SVB in mid-March sent some financial stocks down 30% or more for the month, though the contagion hit mostly smaller, regional banks while larger, money-center banks fared much better. For the quarter, the S&P Regional Banking ETF was down 25%, while the broader Financial Sector ETF was off just 6.5%.
• The heightened risk to the financial system from the bank failures likely impacted the Fed’s decision to raise short-term interest rates by just 0.25% in March, despite an expected increase of 0.50% earlier in the month. The Fed also softened its language regarding future rate increases by omitting a prior forecast for “ongoing increases.” This has raised hope among investors that the Fed may be ready to pause its rate raising campaign, despite the persistence of inflation.
• Notwithstanding the persistence of high inflation and slowing economic growth, there has been some positive economic data so far in 2023. The Atlanta Fed projects first quarter GDP growth of 2.2%, which, while down from fourth quarter GDP growth of 2.6%, nonetheless indicates a growing economy.
• The labor market also remains robust, although slowing. The U.S. economy added 236,000 new jobs in March, roughly in line with expectations. The unemployment rate slipped to 3.5% in March from 3.6% in February, and the labor force participation rate continued to rise, which is considered a positive. The U.S. has added more than one million new jobs in the first three months of this year.
• But recession fears are rising. The Fed recently lowered its forecast for full-year 2023 GDP growth to just 0.4%. Given that estimates for Q1 GDP growth are in the range of 1.5%-2.5%, this suggests that the U.S. could see negative GDP growth in the coming quarters. Recession is generally defined as two consecutive quarters of negative GDP growth.
• Finally, corporate earnings are contracting. S&P 500 earnings declined 4.6% in the fourth quarter of 2022 and are forecasted to decline again in the first quarter of 2023.
• Still, some argue that a recession is not inevitable. Those in that camp point out that inflation appears to have peaked, supply-chain woes have eased, China has re-opened its economy, and oil prices remain low. We’ll see who is right.
• Given all the uncertainties, our outlook for the economy and markets is mixed.  We remain cautious on equities in the near term. Stock valuations, as measured by the S&P 500 Index, are neither overly expensive, nor are they cheap. We expect market volatility to remain elevated until there is more clarity on interest rates, inflation, corporate earnings, and world economic growth.
• While we are maintaining our long-term, value-oriented investment philosophy, we have taken a more cautious view of equity markets for the near term. Instead, beginning last fall, we have been deploying uninvested cash in short-term U.S. Treasuries at attractive, low-risk annualized yields of 4.5% – 5%.
• Once the Fed signals that it is pulling back from its aggressive rate tightening, and economic growth and corporate profits have stabilized, we will resume deploying cash in long-term equities.
• We continue to believe that our disciplined, active approach to individual security selection is more cost effective, tax efficient, and offers better long-term return potential over a full market cycle for our clients.

The Edgemoor Team