In this latest installment of our quarterly report, my colleagues and I share some observations on the market’s second quarter drop, following a strong first quarter, and offer our current outlook for the economy and markets. We also discuss three of the securities we are currently buying: General Electric (GE), Pfizer (PFE), and Johnson Controls (JCI).
Click here to go to the full report on our website. Following are a few highlights:
- The S&P 500 index gave back 2.8% in the second quarter after surging 12.6% in the first.
- Given all of the headline issues surrounding European sovereign debt problems, slowing growth in China and other emerging markets, and economic and political challenges here at home, high volatility is likely to remain with us through the coming quarters. Still, we expect a positive overall market trend over the longer term, primarily due to steady increases in corporate earnings and reasonable current valuations.
- We are cautiously optimistic that eventual resolution of European sovereign debt problems will calm the markets and enable the Eurozone and global economy to avoid the worst-case scenarios.
- Economic growth in China, India, and other large emerging markets has slowed in recent quarters, but we expect the Chinese government and others to provide more stimulus. Growth may not rebound to historical rates, but we believe economic expansion in emerging markets will continue to be higher than in North America, Europe, and elsewhere.
- It is our opinion that the impact of the U.S. elections on our economy and markets is less important than many observers believe. Whatever the outcome, November and the following few months will remove some uncertainty that should help the markets.
- Regarding the various elements that lead to the potential fiscal cliff here in the U.S., we believe it most likely that Congress gives itself an extension of the year-end deadline to reach a solution. Although it will be frustrating to see our elected officials once again avoid making tough decisions, a delay will give the economy more time to gain momentum and lawmakers more time to arrive at reasonable compromises for sound economic policy.
- Companies should continue to post solid earnings growth to support higher valuations, even though earnings are not likely to increase as much in the second quarter as they have in previous quarters during this recovery.
- In this environment, we are sticking with the stocks of large capitalization, dividend paying, multinational firms that we see as having the best combination of financial strength and attractive valuations.
- For income investments, we continue to favor preferred stocks, master limited partnerships, and high-yielding equities over bonds. Our income portfolios are currently yielding about 6% and also offer some potential for capital appreciation, both of which we consider to be far more attractive than opportunities in bonds today.
Jordan Smyth and the Edgemoor Investment Advisors Team