Buckle Up! – Highlights from Edgemoor’s October 2016 Newsletter

In this latest installment of our quarterly report, my colleagues and I share some observations on the third quarter, discuss the potential impact of the upcoming election, and also offer our broader outlook for the economy and markets.  Click here to go to the full report on our website.  Following are a few highlights:

  • We are watching the Presidential race closely but do not believe the upcoming election will have a significant long-term impact on the markets.  Other factors more directly and fundamentally influence investment returns, and markets have done well through many different political environments.
  • We agree with the market consensus that the Fed will probably raise rates in December, unless economic data changes significantly.  Any increase would likely be 1/4%, enough to signal the Fed’s willingness to act to control inflation but not enough, in our opinion, to derail economic growth.  Though it should not surprise anyone, this change could temporarily rattle markets.
  • U.S. economic growth rose to 1.4% in the second quarter, and it appears that growth should pick up further in the second half of 2016.  GDP is increasing more slowly than last year, but we believe the near-term odds of a U.S. recession are still slight.  Elsewhere in the world, the economic picture is mixed but, in our view, positive overall, and central bankers are currently maintaining their stimulative policies.
  • The third quarter saw a reversal of many trends from the first half of the year.  For example, technology and financial stocks went from lagging in the first half to outperforming in the third quarter.  Meanwhile, several defensive asset classes that performed well in the first half reversed course due to more positive economic data and increased odds of an interest rate hike by the Fed.  Also, U.S. stocks outperformed in the first half but lagged foreign stocks in the third quarter.  Since it is nearly impossible to predict all of these short-term changes in sentiment, we believe these shifts emphasize the importance of a well-diversified, global portfolio.
  • Corporate earnings for the third quarter will likely be flat or down slightly, so they will not provide much lift to the broad market until they pick up meaningfully from current levels.
  • Particularly encouraging is the recent performance of value stocks, which are beating growth stocks for the first time in several years.
  • With a rate hike likely in December and interest rates still at historically low levels, we continue to favor other income classes over most bonds.

As always, feel free to contact us if you have any questions or comments.  For more information, visit our website.

Jordan Smyth and the Edgemoor Investment Advisors Team

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Presidential Elections and the Stock Market

When it comes to long-term stock market returns, does it matter who occupies the White House?  According to a recent analysis by Dimensional Fund Advisors, which you can read by clicking on this link, the answer is, “No.”  While this conclusion may seem counterintuitive, particularly in the midst of this year’s contentious campaign, we agree that trying to invest according to the person or party in the White House is likely to be less fruitful than a sound, steady, long-term strategy.

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The Importance of Interest Rates in a Slow-Growth World

Fidelity’s Jurien Timmer just published an interesting piece discussing the effect of changes in interest rates on stocks when rates are low, as they are currently.  Click here to read the report.  Based on his analysis, now may be a good time to buy stocks at attractive prices, particularly if corporate earnings pick up in the coming quarters.

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Here Comes the Brexit – Highlights from Edgemoor’s July 2016 Newsletter

In this latest installment of our quarterly report, my colleagues and I share some observations on the Brexit referendum and other events from the second quarter of 2016 and also offer our outlook for the economy and markets.  Click here to go to the full report on our website.  Following are a few highlights:

  • Following their surge through 2015, growth stocks as a group now trade at an unusually high premium to value stocks.  We believe value stocks, like those that comprise the bulk of our equities portfolios, are now poised for a rebound relative to growth and have the potential to follow their historical pattern of not just closing the gap but resuming their long-term outperformance.
  • Stocks rose in the second quarter despite the hiccup caused by the surprise result from the Brexit referendum in late June.
  • It will be years before we really know the impact of the United Kingdom’s withdrawal from the European Union, but we are optimistic that global markets will weather this storm as they have many others in the past.
  • Despite the disruption caused by the Brexit referendum, economic conditions in the United States remain fairly steady. However, we do not think conditions are robust enough for the U.S. Federal Reserve to hike interest rates until next year.
  • With companies beginning to report results over the coming weeks, expectations are for a decline in S&P 500 earnings compared to the prior year. We believe earnings will begin to pick up in the second half of the year as the economy continues to strengthen.
  • Overall, we expect the global economy to continue to expand and the United States to outperform most other economies.
  • As the likelihood of a Federal Reserve rate hike has diminished and bond yields again hit historic lows, yield-hungry investors have bid up the prices of many of our income generating securities. We are taking a cautious approach to investing new money at these elevated valuations, and we may look to selectively trim some of our income holdings. However, we continue to find opportunities in some income asset classes such as preferred stocks, midstream energy companies, and convertible securities.

As always, feel free to contact us if you have any questions or comments.  For more information, visit our website.

Jordan Smyth and the Edgemoor Investment Advisors Team

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Here Comes Brexit

United Kingdom voters surprised many by choosing yesterday to leave the European Union, a move that is roiling global markets today.  We are disappointed by the decision to leave the E.U., since we think the global economy would be stronger with the U.K. remaining, but we believe the economy and markets will survive this change without a major long-term impact.  We also expect investors to return their attention soon to issues such as the U.S. Federal Reserve’s actions on interest rates, economic trends in China, the presidential campaign in the United States, and other news that has been at the forefront of investors’ minds for months.

Now that voters have decided, what happens next?  The campaigning in the U.K. to replace resigning Prime Minister David Cameron, who wants to leave office by October, has already begun and will be a focus of voters there in the coming months.  In the meantime, politicians in the U.K., E.U., and elsewhere will begin the process of trying to figure out new trade, migration, and other agreements to minimize the disruption of the U.K.’s exit.  This process may take two years or longer, and we don’t expect significant changes anytime soon.  Since continued trade between the U.K. and the E.U. is in the best interests of most involved, we also expect the ultimate agreements will represent less change from the status quo than many fear.

Though the outcome may not be ideal for the global economy and markets, yesterday’s historic vote removes a major element of uncertainty.  We plan to stay the course with our investments while looking for opportunities to take advantage of what we believe will likely be a short-term overreaction to the vote.  Global markets have recovered from far worse shocks than the Brexit, and we expect a similar bounce back over the coming months.

The information provided in this commentary should not be considered financial advice or a recommendation to buy or sell a particular security. The opinions expressed herein are those of Edgemoor Investment Advisors, Inc. (Edgemoor) and are subject to change without notice. You should always obtain current information and perform due diligence before investing.

Edgemoor Investment Advisors, Inc. is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level or skill or training. More information about Edgemoor Investment Advisors, Inc. including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.

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