What do lower oil prices mean for investments?

After a plunge of more than 50% since last summer, oil prices appear to be stabilizing – at least for now – around $50 per barrel.  Where they go from here is unknown, but easier to predict is the impact of lower oil prices on investments in certain sectors or regions of the world.  Click here to read a research report from Fidelity that forecasts continued low oil prices, compares the impact of lower prices on net importers like the United States (positive) to the impact on exporters like Russia (negative), and suggests sectors that will benefit from oil’s decline.

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Positive Thoughts for the New Year

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.

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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Falling Oil Prices Likely to Provide Economic Boost

While it is clear that oil prices are falling, the net effect of reduced prices on the economy is more difficult to determine.  Lower gas prices should enable consumers to spend more on other goods and services, and declining energy costs also benefit many industrial businesses.  However, lower oil prices hurt oil and gas producers and the many companies that support the energy sector.  Overall, we see a net benefit to the U.S. economy, as Fidelity argues in this excellent review of the impact of the falling price of oil (click to access).

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16 Rules for Investors to Live By

We thought this recent article by Morgan Housel in The Wall Street Journal was excellent, and we encourage you to find time to read it by clicking anywhere in this sentence (subscription may be required – sorry). Enjoy!

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All Eyes Still on the Fed – Highlights from Edgemoor’s Fall 2014 Newsletter

In this latest installment of our quarterly report, my colleagues and I share some observations on the third quarter and the turbulent start to the fourth quarter of 2014, offer our outlook for the economy and markets, and discuss three of the securities we are currently buying: Qualcomm (QCOM), Sanofi (SNY), and Southern Company (SO).

Click here to go to the full report on our website.  Following are a few highlights:

- We forecast ongoing support from Fed policies and solid third quarter corporate earnings, which should combine to boost markets through the end of the year.  In the meantime, investors should brace themselves for more volatility similar to what we have seen recently.

- On volatility and pending Fed actions: Markets have been struggling to predict the exact timing of the Fed’s moves, beyond the expected end of bond purchases this month, and nobody knows exactly what the impact will be.  As a result, volatility has picked up.  Based on current market information, it appears that the Fed will not hike rates until late 2015, and we expect the increase to be gradual.  Any signs that rates will rise sooner or more rapidly would no doubt add to volatility.

- Recent data support the Fed’s view that the U.S. economy remains healthy.  Even though growth has been slower than in past recoveries, the current U.S. economic recovery has been an extended one, and the United States should continue leading the world’s major economies.

- The strength of the dollar presents a bit of a conundrum.  The dollar’s appreciation has contributed to falling prices of commodities and reduced the cost of U.S. imports, both trends that boost the purchasing power of U.S. consumers.  However, the stronger dollar makes U.S. exports less attractively priced relative to goods produced abroad, putting pressure on U.S. companies to keep costs, including wages, low to remain competitive.

- Geopolitical issues remain a concern, but we do not think the impact on the global economy and markets will be severe.

- Forecasts call for third quarter corporate earnings increases averaging about 5%, which should alleviate some concerns about economic strength.  We will be watching for confirmation that the companies we own are optimistic about their long-term prospects, as well as for occasions to buy shares of others that express short-term concerns and become available at prices below fair value.

- Though emotionally difficult, pullbacks are healthy for the markets and present us with buying opportunities.  The S&P 500 index is down about 7% from its peak, and we will likely see a larger drop at some point in the near future.  If so, we will take advantage where we can, and we remain optimistic about the long-term prospects for our portfolios.

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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