Keeping Warm in 2018

In this latest installment of our quarterly report, my colleagues and I share some observations on the fourth quarter of 2017 and offer our outlook for the economy and markets.  Click here to go to the full report on our website.  Following are a few highlights:

  • The S&P 500 and other major indexes hit new highs throughout 2017. The S&P 500 index returned 21.8%, including dividends, its best performance since 2013, and delivered a positive return in every month for the first time.  Foreign stocks, led by those in emerging markets, performed even better than those in the United States as they also benefited from the global economic expansion and low interest rates.
  • The U.S. economy continued to expand and added more jobs during the fourth quarter for a total of 2.1 million new jobs during the year, compared to 2.2 million added in 2016. Unemployment in December was a low 4.1% for the third consecutive month.
  • Investors applauded the many positive earnings surprises announced during each quarter of the year and the resulting 18% surge in S&P 500 annual operating earnings (including fourth quarter estimates). Anticipation of potential positive benefits in future years from large corporate tax cuts and reduced regulation also boosted markets.
  • The multiple of earnings investors were willing to pay for stocks increased only slightly during the year, the first pause in the multiple’s steady increase since 2011. The S&P 500 index now trades for approximately 19 times projected 2018 operating earnings, though earnings estimates may increase as analysts factor in the positive impact of the new tax bill.
  • The Fed currently intends to raise rates three times this year.  Inflation is perhaps the most important factor impacting the timing of the Fed’s moves. Though inflation remains below the Fed’s target of 2% per year, we believe the tightening job market will soon lead to increasing wages as businesses compete to hire more employees.
  • The recently enacted U.S. tax cuts have lifted business optimism and should increase corporate earnings. We expect corporations to boost dividends and repurchase shares with the additional cash resulting from lower taxes and profits brought back to the United States from overseas.
  • Overall, we are optimistic regarding the U.S. and foreign stock markets, but we also know that we are long overdue for a correction (decline of 10%-20%) in stock prices. Fortunately, we currently see few of the typical signs of investor overconfidence that have preceded past market tops.

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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Resolutions for 2018

Jazon Zweig is one of our favorite columnists who is published in the Wall Street Journal every Saturday/Sunday Edition.

Here are his comments on 2018 New Year’s resolutions, surprisingly not about investments and most worthwhile reading.  Click on the link below.

http://jasonzweig.com/less-phone-more-nature-34-resolutions-for-a-better-2018/

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Best Practices to Help Prevent Cyber Fraud

At our November, 2017 Investment Forum, we discussed cyber security and the measures you can use to protect your identity, personal data, and assets from online theft.    We developed a 1-pager that outlines the best practices to help prevent cyber fraud as well as the resources available if you do find yourself the victim of cyber fraud.    We hope you find it useful.

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Be Tax Efficient This Giving Season

As we approach the end of the year, charitable giving is once again expected to ramp up between Thanksgiving and December 31st, and we at Edgemoor would like to share some advice with any clients that wish to make donations. Although there is no wrong way to donate to charity, there are steps you can take to minimize taxes and maximize impact.

Donating IRA Distributions

Clients over the age of 70 ½ who have an IRA can donate up to $100,000 of distributions to charity instead of receiving it as taxable income. We recommend using funds from non-IRA accounts for donations above the Required Minimum Distribution amount. This strategy allows IRA assets to grow tax-free for as long as possible, ultimately increasing the funds available for future donations, expenses, and beneficiaries of Inherited IRAs.

Gifting Appreciated Stock

You can avoid taxable capital gains if you donate appreciated securities that have been held in taxable accounts for at least a year. This is preferable to selling the securities and donating the cash proceeds, because you avoid realizing long-term capital gains while still getting the full deduction for up to the fair market value of the donated securities. We recommend donating the securities with the largest capital gains to maximize the tax benefits of charitable giving.

Making Direct Donations vs. Funding Donor-Advised Funds

Appreciated securities may be donated either directly to charities or to a Donor-Advised Fund (DAF). DAFs are investment vehicles for giving to charitable organizations. Edgemoor offers DAFs through its custodians, Fidelity Investments and Charles Schwab & Co.

Appreciated stock donations to DAFs have several advantages:

  • You can choose the charities that will receive grants from DAFs
  • You can take the full tax deduction upfront for donating to DAFs and then distribute the donated assets to the designated charities over time
  • You can invest and grow your assets donated to DAFs if you wait to distribute them over time
  • You can get help from DAFs to research charities, track your donations, and set up automatic recurring donations

Fidelity and Schwab both require a minimum initial balance of $5,000 for DAFs and provide lists of select funds for investment of donations pending their distribution to charities. For accounts exceeding $250,000 you can have your DAF funds managed by the investment advisor of your choice and invest in stocks, bonds, and a wider range of funds. Administrative fees for DAFs range from 0.10%-0.60% based on account size.

We at Edgemoor would be happy to provide allocation recommendations free of charge for DAFs invested in the lists of DAF select funds, or to manage DAFs exceeding $250,000. Setting up a charitable giving account through a DAF is easy, and Edgemoor is ready to prepare all forms and guide you through the process.

Timing Your Donations

You receive the tax benefits from giving to charity, either directly or to a DAF, in the year you make the donation. There is a maximum deduction you can take for charitable giving which is a function of your taxable income. Spreading out your donations over multiple years may maximize your tax savings. However, if you have a higher than usual income in a single year (e.g. from selling a family business), it may be best to make one large donation to a DAF to reduce your large tax bill that year, then distribute the funds to designated charitable organizations over multiple years.

If you wish to receive tax benefits in a certain year, the charitable organizations or DAFs must receive your donations by December 31st of that year. We recommend beginning to transfer assets at least several weeks before the end of the year to ensure the charitable organization or DAF can process your donations in time.

Contacting Edgemoor

If you have any questions, please feel free to call 301-543-8881 or e-mail us at rroane@edgemoorinv.com.

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Rising Waters

In this latest installment of our quarterly report, my colleagues and I share some observations on the third quarter of 2017 and offer our outlook for the economy and markets.  Click here to go to the full report on our website.  Following are a few highlights:

  • The S&P 500 index returned 4.5% in the third quarter and even climbed in September, a month that usually brings declines.  U.S. market volatility has been subdued for almost the entire year and during the third quarter was the lowest since 1968.
  • S&P 500 index companies reported that earnings increased about 10% in the second quarter, following a 15% rise in the first, as the economy steadily expanded.  GDP growth was 3.1% for the second quarter, up from 1.2% in the first.  The U.S. economy has added an average of 176,000 jobs per month in 2017 and unemployment remains low at 4.2%.
  • We are currently optimistic that the combination of low interest rates and inflation, steady economic growth around the world, and solid earnings will continue to support stock prices.  Passage of a bill reducing U.S. corporate income taxes could provide an additional boost to earnings and stocks.
  • Current expectations are for one more Fed rate increase of 0.25% this year, most likely in December. Low inflation due to a combination of technological improvements, globalization, and demographics gives the Fed reason to move slowly with rates.  We believe the markets will most likely take any slight increase in stride, as with other recent Fed moves.
  • Global economies are expanding together for the first time since the Great Recession, and we expect this trend to continue.
  • Balanced against these positive trends and opportunities, valuations are high relative to historical levels, threats lurk in many places, and a market reversal at some time in the future is inevitable.  However, the timing of any pullback is unpredictable, and the catalyst may be an event that few could foresee now.

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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