Waiting on the Fed

In this latest installment of our quarterly report, my colleagues and I share some observations on the first quarter of 2015, offer our outlook for the global economy and markets, and discuss several of the securities we are currently buying: Google (GOOG), Johnson Controls (JCI), and international mutual funds from Dimensional Fund Advisors.

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

- Stocks rose slightly in the first quarter as U.S. Federal Reserve chair Janet Yellen’s remarks about gradual interest rate increases comforted investors, who are adjusting to lower oil prices, a stronger dollar, and mixed economic conditions around the world.

- Whenever the Fed finally raises rates – likely before year-end – we expect the increase to be gradual and believe the U.S. economy will continue to expand.

- The United States is currently the strongest of the major global economies, even though real GDP growth has been limited to 2%-2.5% for several years and is likely to remain in a similar range in 2015.

- The dramatic fall in oil prices – over 50% since last summer – is both good and bad for the U.S. economy but should have a positive impact overall.

- Some of the world’s major economies are not faring as well as the United States and require more stimulus, so central banks abroad are easing rates in Europe, China, and Japan.

- The relative health of the U.S. economy provides select opportunities to make good investments here at home, and Europe and other foreign markets also present pockets of opportunity for disciplined, patient investors.

- For income, we continue to favor utilities, real estate investment trusts, preferred stocks, master limited partnerships, and convertible securities over bonds in the current environment of low interest rates that are likely to rise.

- We remain optimistic that the stock market, bolstered by the economic benefits of lower energy prices and low interest rates, will again provide positive returns in 2015.

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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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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