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.
Jordan Smyth and the Edgemoor Investment Advisors Team