In this latest installment of our quarterly report, my colleagues and I share some observations on the fourth quarter of 2014 and the heightened volatility to start 2015, offer our outlook for the economy and markets, and discuss three of the securities we are currently buying: PNC Financial Services (PNC), General Electric (GE), and Blackstone Mortgage Trust (BXMT).
Click here to go to the full report on our website. Following are a few highlights:
- 2014 was another good year to be invested in U.S. stocks, which rose again due to continued recovery in the U.S. economy, increased corporate earnings, and support from the Federal Reserve. Elsewhere in the world stock prices generally fell, primarily due to weaker economic conditions.
- Like last year, stocks are off to a bit of a volatile start to 2015, this time amid concerns regarding oil prices, the global economy, and geopolitical events, including terrorism. The market likely will remain volatile, and we expect to see a correction at some point during the year.
- We foresee continued economic recovery in the United States and low interest rates around the world, even though the Fed may begin to gradually raise the federal funds rate later this year.
- We believe that, on balance, the drop in oil prices over the past six months will be a net benefit that will support ongoing U.S. economic growth and help to boost the earnings and stock prices of many of the companies we own.
- Investors will be closely watching for any hints from the Fed regarding upcoming changes in its rate policies. Current expectations are for an increase in the federal funds rate in the second half of this year, but the exact timing will depend on the Fed’s view of economic conditions. Other central banks are being more aggressive than our Fed as they face slowing economic growth.
- When rates do increase, the value of bonds will fall. Meanwhile, rates are currently so low that the rewards for holding bonds are not attractive enough to offset the risks of buying them. We continue to prefer utilities, real estate investment trusts (REITs), preferred stocks, master limited partnerships, and convertible securities for income, given their higher yields and our expectations that many will increase payouts to investors over time.
- The dollar’s strength benefits consumers, businesses heavily dependent on imported goods, and manufacturers (due to the lower price of energy), but it makes U.S. companies’ products more expensive in other countries. We are monitoring our positions for any signs that the dollar’s rise, or a sluggish global economy, is negatively impacting the ability of companies we own to generate profits.
- Overall, we remain cautiously optimistic regarding prospects for the stock market and more so for the specific stocks in our portfolios. We expect the market to rise in line with corporate earnings and for our holdings to outperform due to their reasonable valuations and favorable business prospects.
Jordan Smyth and the Edgemoor Investment Advisors Team