What a Year – Highlights from Edgemoor’s January 2017 Newsletter

In this latest installment of our quarterly report, my colleagues and I share some observations on 2016, discuss the potential impact of upcoming policy changes under the new administration and Congress, 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:

  • Stocks rallied through the end of 2016, as investors appeared to express greater optimism about the U.S. economy and improving corporate earnings.  Value stocks outperformed growth stocks after several years of lagging.
  • Anticipation of the new administration’s planned changes in tax and regulatory policy to support business activity and investment helped to boost the market.  In addition, a return to earnings growth in the third quarter, after six quarters of declines, likely played an important part in the rally.
  • Oil prices also surged in 2016 from their February low to about $53 per barrel at year end, providing a needed boost to the energy sector.
  • One event that surprised nobody was the U.S. Federal Reserve’s decision to increase the federal funds rate by another 0.25% in December, a full year after the last hike.  Stocks plowed ahead, but bonds fell as interest rates increased.
  • We enter 2017 believing the U.S. economy is healthy and expect it to continue its slow but steady expansion.  Consumer confidence is at a 16-year high, and the most recent jobs report showed increases in wages.  Inflation remains low, and business optimism should improve with the expected policy changes.
  • Beyond the United States, the European economy continues to expand, though more slowly than the U.S. economy, and the European Central Bank remains committed to low interest rates, bond purchases, and other monetary support.  Chinese and Japanese exporters could benefit from a strengthening U.S. economy, and Japan’s economy showed relatively strong growth in the third quarter of 2016, a positive sign after many years of stagnation.
  • Overall, we are currently optimistic regarding stock market returns for the coming year.  We believe valuations remain reasonable, even after the recent surge, and we are encouraged by the outperformance of value stocks over growth in 2016 and so far in 2017.
  • For income investments, we continue to favor other asset classes over most bonds, given low bond yields and our expectations of further rate increases, which would cause bond prices to drop.

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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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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