In this latest installment of our quarterly report, my colleagues and I share some observations on the market’s solid gain in the second quarter of 2014, offer our outlook for the economy and markets, present our thoughts regarding the view among some that the markets are overheated, and discuss three of the securities we are currently buying: Apple (AAPL), Devon Energy (DVN), and Gilead Sciences (GILD).
Click here to go to the full report on our website. Following are a few highlights:
- After the market’s modest rise in the first quarter, stocks picked up steam in the second quarter. The S&P 500 index gained 5.2%, the best second-quarter performance since 2009, on improving economic conditions and expectations of continued low interest rates.
- We forecast further, modest gains for the stock market as the economy increases the pace of its recovery and corporate earnings follow. In this environment, picking specific securities that trade at a discount, as opposed to buying the broad market, can make all the difference.
- We remain wary of bonds given current low yields and expectations of increasing interest rates in 2015, and we continue to favor the total return potential of high yielding equities and other income generating securities.
- Former Fed Chair Ben Bernanke committed the Fed to keeping rates low to boost the economy’s recovery from the financial crisis, and current Chair Janet Yellen is continuing this same strategy. So far, inflation has remained tame, freeing the Fed to continue its stimulative policies until the economy appears to be strong enough to continue expanding without the Fed’s assistance.
- Economic data seem to confirm the widely held belief that the 2.9% drop in gross domestic product during the first quarter was an anomaly caused by severe winter weather. The U.S. economy is showing signs of vigor, and we expect continued steady growth.
- The combination of steady economic growth, low interest rates, and low inflation creates a favorable environment for stocks.
- One of the central tenets of our value-oriented approach to investing is that purchasing specific securities at a discount to fair value, based on a detailed analysis of fundamental measures, is the best way to succeed. Even in today’s market, we are able to find enough stocks available at a discount to fair value to create a diversified portfolio with appreciation potential greater than that of the broad market.
- There will be a correction at some point – we do not know when, but we have not seen a decline of 10% since 2011. Given the near impossibility of timing a correction perfectly, we think the best strategy is to hold securities that should perform relatively well through any downturn and bounce back when the market recovers.
Jordan Smyth and the Edgemoor Investment Advisors Team