In this latest installment of our newsletter, we share our observations of the markets and the economy in the first quarter of 2025.  Click here to go to the full report on our website.  Following are the highlights:

• Uncertainties about economic policies around trade and tariffs sent markets reeling in the first quarter of 2025, resulting in declines in both the S&P 500 and Nasdaq Composite indices.  It also reversed a string of five consecutive quarters of gains and two consecutive years of 25%+ returns for the broad stock market.
• During the first quarter, the S&P 500 Index posted a negative total return of 4.3% while the Nasdaq fell 10.5%, putting the latter in correction territory. 
• The bond market provided some relief to investors, as the Bloomberg Barclays Aggregate Bond Index returned a positive 2.8% for the quarter, as investors flocked to the safe haven of bonds, pushing up prices and tamping down yields. 
• The sharp selloff in equities continued in the early trading days of April, roiling investors further and sending most major indices into or near bear market territory (defined as a fall of 20% or more from a recent high), before recovering somewhat in mid-April. 
• Investors also rotated out of growth-oriented, technology stocks in the first quarter, favoring instead more defensive, dividend-paying stalwarts like utilities and consumer staples.  It was the worst quarterly performance for tech stocks since 2020.
• The sectors that had been left behind in the tech runup of 2023-2024, such as energy, healthcare, consumer staples, and utilities, were the top performers in Q1 of 2025. 
• One key take-away from this year’s market so far is that diversification works.   Well-diversified portfolios, like the ones we construct for our Edgemoor clients – with exposure spread across industry sectors, market capitalizations, geographies, and asset classes – provide important ballast and protection for long-term investors.
• The U.S. economy is still showing resilience, though cracks are emerging. On the positive side, corporate earnings are still growing, consumer spending is still positive, and unemployment remains historically low.  Household balance sheets are healthy, and consumer debt remains under control, for now.
• However, a sustained trade war could lead to higher prices and lower economic growth and is already causing some businesses and consumers to pull back on spending and investing.  Growth forecasts for 2025 have been revised downward and are predicting a considerable slowdown from 2024.
• The slowdown of the U.S. economy is raising fears of an economic recession or potentially stagflation, which is the combination of stagnant growth and higher inflation. Since the tariff announcement on April 2nd, many Wall Street strategists have increased the probability of the United States entering a recession this year. However, the current tariff situation is fluid, and recessions are impossible to predict with any certainty. Ultimately, it will be the breadth, depth, and length of the tariffs that will determine the long-term impact on the U.S. economy.
• Our Outlook:  In the near term, we expect elevated volatility in global stock markets to continue given ongoing uncertainties. However, we also remain committed to our strategy of constructing long-term, broadly diversified portfolios of stocks and income securities we consider high-quality and that can weather periods of market volatility and continue to grow their revenues, earnings, and dividend payouts. We stand firm in our belief that good investments should not be sold at depressed prices.
• Looking forward, we anticipate new opportunities will emerge in certain securities as they become more reasonably valued.  We have already been favoring dividend-paying securities, international stocks, and short-term Treasury bills yielding 4%+.
• Even though markets can be volatile quarter-to-quarter and year-to-year, we emphasize to our clients the importance of sticking to a long-term investment plan focused on their specific goals and objectives.  We believe our patient, disciplined approach to individual security selection offers our clients strong long-term return potential in a cost effective and tax efficient manner.  We appreciate your confidence in our time-tested investment philosophy.

In this latest installment of our newsletter, we share our observations of the markets and the economy in the fourth quarter and for the full year of 2024.  Click here to go to the full report on our website.  Following are the highlights:

• 2024 proved to be another strong year for equity investors.  The S&P 500 Index, the broadest measure of the U.S. stock market, delivered its second consecutive year of 25%-plus returns, the first time since 1997-1998 that the index notched back-to-back 20%-plus gains.
• The positive momentum in equity markets was propelled by a combination of strong GDP growth, cooling inflation, solid corporate earnings, and falling interest rates. 
• For the year, the S&P 500 had a total return of 25.0%, on top of the 26.3% gain generated in 2023.  The Communications Services and Information Technology sectors once again drove the gains, with Financials and Utilities not far behind.  Volatility returned late in the fourth quarter, as equities declined 2.4% in December.
• The bond market also experienced some weakness at year-end. The 10-year Treasury yield, a key barometer of the bond market, jumped from 3.6% in September to 4.6% in December, sending bond prices down. (Bond prices move in the opposite direction of interest rates or yields).  As a result, the Bloomberg Barclays Aggregate Bond Index returned just 1.3% for the year, driven down by a 3.1% loss in the fourth quarter.
• The Federal Reserve capped off this year’s rate-easing cycle that began in September with a modest 25 basis point (one-quarter of 1%) cut to its benchmark Federal Funds rate in December 2024.  This brought the total rate cuts in 2024 to 100 basis points, or a full 1%, to a final range of 4.25% – 4.5%. 
• Chairman Jerome Powell also signaled in his remarks a cautious stance for 2025, indicating the likelihood for just two additional rate cuts this year, down from four cuts expected earlier in the fall.  The caution stemmed from a number of factors, including still-high inflation forecasts coupled with strong growth and employment expectations. 
• The U.S. equity markets reacted negatively to the Fed forecast, with the S&P dropping nearly 3.0% and the Nasdaq sinking 3.6% on the day of the announcement. 
• Inflation remains sticky. While inflation has come down significantly since its peak in June 2022, the absolute level of prices in the U.S. still remains high, especially in areas such as food, housing, and services (think insurance premiums).  Housing comprises roughly 35% to 40% of the CPI index and is proving to be the biggest and most difficult obstacle to the Fed reaching its 2% inflation target. 
• The U.S. economy has achieved a favorable combination of strong GDP growth, low unemployment, and cooling inflation due in part to surges in both productivity and available labor.  Between 2022 and 2024, productivity increased by 4% cumulatively, nearly double the average annual rate for the prior ten years.
• These labor advances resulted from a confluence of factors, including a surge in new business formations, technological advances like AI that boosted worker efficiencies, and expansionary U.S. fiscal policies that targeted major domestic initiatives like semiconductor production.    
• The fundamentals of the U.S. economy – GDP growth, unemployment, corporate earnings, and consumer spending – also all remain on solid footing. Third quarter GDP growth was a strong 3.1%, following 3% growth in the second quarter.  For the full year 2024, GDP growth is expected to be 2.7% followed by 2% growth in 2025.
• With the November Presidential election now behind us, investors are waiting to see what economic policies will actually get implemented by the new administration.  Most are expecting an easing of regulations, a tightening of immigration policies, the extension of tax cuts for both consumers and corporations, and the imposition of tariffs on a wide array of goods and services.
• So, who might be the winners and losers from such policies?  No one really knows at this point, but the potential beneficiaries could be banks and other financial institutions, domestic manufacturers, and energy companies, while retail, construction, and agricultural businesses could see a decline in labor supply, depending on the extent of new immigration policies. 
• We remain cautiously optimistic about U.S. stocks, despite lofty current valuations. The forward price-to-earnings ratio for the S&P 500 is currently 21.7 times, higher than the five-year average of 19 times.  But not all sectors or companies carry such high valuations, and we have been able to find pockets of opportunity in areas like energy, healthcare, and financials at substantially lower valuations.
• Looking ahead, the risk-return trade-off of bonds has become more attractive.  Higher starting yields and lower future rates should combine for attractive long-term returns and a valuable ballast to equity exposure in balanced portfolios.
• Overall, we maintain a positive long-term outlook for the U.S. economy and markets.  But it remains to be seen whether momentum or valuation will dictate investment returns in 2025.
• We believe our patient, disciplined approach to individual security selection offers our clients strong long-term return potential in a cost effective and tax efficient manner.  Even though markets can be volatile quarter-to-quarter and year-to-year, we emphasize to our clients the importance of sticking to a long-term investment plan focused on their specific goals and objectives.  We appreciate your confidence in our investment philosophy.

The Edgemoor Team

In this latest installment of our newsletter, we share our observations of the markets and the economy in the third quarter of 2024. Click here to go to the full report on our website.  Following are the highlights:

• Equity markets continued to post gains in the third quarter of 2024, but with higher volatility than in the first half of the year.  Uncertainty surrounding the election, interest rates, and global conflicts contributed to the market swings, as did a temporary shift away from the long-dominant Magnificent Seven tech giants which have dominated the market for the last several years.
• Despite this increased volatility, the overall trajectory of the markets remained positive in Q3 and for the year.  The S&P 500 Index, the broadest measure of the stock market, posted a total return of 5.9% in Q3 and 22.1% year-to-date in 2024. 
• Bonds also gained ground in the third quarter, with the Bloomberg Barclays Aggregate Bond Index posting a total return of 5.2%.  For the year-to-date period through September, bonds were up 4.4%, reversing a negative total return from the first half of the year.
• The Federal Reserve lowered its benchmark Federal Funds rate by 50 basis points (one-half of 1%) on September 18th, in a move that surprised many market watchers who were expecting a more modest 25 basis point cut.  But the Fed went big, citing a labor market that has slowed and an inflation rate that is moving sustainably toward its target of 2%. 
• The U.S. economy maintained positive growth in the third quarter, although signs of a slowdown emerged.  The labor market showed the most weakness through August 2024, though it surprised to the upside in September.  Overall, the unemployment rate has risen over the last year to 4.1% in September from a cycle low of 3.5% in July 2023. 
• On the inflation front, core inflation continues to decline toward the Fed’s 2% annual target.  In August, core CPI was 2.5%, below the consensus forecast of 2.6% and well below July’s rate of 2.9%.  The August reading was the smallest increase in inflation since February 2021 and significantly less than the peak of 9.1% in June 2022.
• Consumer-related data also remains robust, with consumer spending rising 2.8% in August and core retail sales up nearly 4% year-over-year.  This helped U.S. GDP grow a healthy 3% in the second quarter, up from 1.3% in the first quarter.  Consumer spending accounts for nearly 70% of U.S. GDP growth.  For the third quarter of 2024, the Fed’s GDPNow model currently forecasts U.S. GDP to grow 2.5%. 
• Corporate earnings also continue to grow.  Third quarter S&P 500 earnings are projected to increase 4.6% year-over-year, which would mark the fifth consecutive quarter of earnings growth for the index. 
• With November 5th fast approaching, we expect this highly charged and razor-thin Presidential race will continue to impact markets in the near term.  But history has shown, over and over again, that elections do not drive markets over the long term.  Instead, it is the underlying health of the economy, including corporate earnings, GDP growth, and interest rates that drive long-term market returns. 
• It is our job as investment advisors to put the political noise aside and focus on the economic and business fundamentals of the securities we own. Our goal is to stay invested in high-quality companies and continue to look for new investment opportunities, remaining focused on fundamentals such as earnings, growth, and valuation. 
• We are cautiously optimistic about U.S. stocks, despite lofty valuations.  The forward price-to-earnings ratio for the S&P 500 is currently 21.4 times, higher than the five-year average of 19 times.  But not all sectors or companies carry such high valuations, and we have been able to find pockets of opportunity in areas like energy, healthcare, and financials at substantially lower valuations.
• We believe our patient, disciplined approach to individual security selection offers our clients strong long-term return potential in a cost effective and tax efficient manner.

The Edgemoor Team

In this latest installment of our newsletter, we share our observations of the markets and the economy in the second quarter of 2024. Click here to go to the full report on our website.  Following are the highlights:

• The stock market carried its strong momentum that began in late 2023 into the second quarter of 2024, driving most equity market indices to record highs. The S&P 500 Index alone set more than thirty new 52-week highs in the second quarter, one of the highest numbers ever recorded in a single quarter.
• The S&P 500 index posted a 4.3% total return in the second quarter, putting its total return for the first half of the year at 15.3%. This marks the second year in a row that the S&P 500 has notched double-digit gains in the first six months of the year.
• Both the S&P 500 and the Dow Industrial average hit new benchmark levels during the quarter, with the S&P topping 5,500 and the Dow surpassing 40,000 for the first time ever, only to retreat slightly at quarter-end.
• The bond market, as measured by the Bloomberg Barclays Aggregate Bond Index, reversed losses from the first quarter to post a slightly positive 0.1% total return in Q2 2024. For the year, however, the bond market remained in negative territory, returning negative 0.7% in the first six months of 2024.
• Bolstered by the combination of a resilient U.S. economy, solid corporate earnings and GDP growth, and continued strong momentum in the technology sector, the market rally that started in late 2023 has forged ahead in 2024.
• As expected, the Federal Reserve held its benchmark fed funds rate steady at 5.25% – 5.5% at its June meeting, continuing a pause in interest rate activity that began in mid-2023. The Fed also signaled just one 25 basis point cut (one-quarter of 1%) in late 2024, though some members believe that two 25 basis point cuts are still possible.
• Inflation continued to cool, with the Consumer Price Index, or CPI, rising 3.0% for the twelve months ending in June 2024, below the consensus estimate of 3.1% and lower than the 3.3% rate in May. The overall decline in the costs of consumer goods and services in June marked the first such monthly decline since the start of the pandemic in 2020.
• Corporate earnings have remained solid and are projected to accelerate in the latter half of 2024 and into 2025. For Q2 2024, the estimated year-over-year earnings growth rate for the S&P 500 is 8.8% which, if true, would be the largest quarterly growth rate since Q1 2022. For the full-year 2024, S&P 500 corporate earnings are projected to grow 11.3% year-over-year, accelerating to 14.4% for FY2025.
• There have been signs that the U.S. economy is slowing. U.S. GDP slowed to 1.4% in the first quarter of 2024, down from 3.4% in the last quarter of 2023. But that slowdown may have been short-lived, as the latest GDPNow model by the Fed projects second quarter GDP growth to rebound to 2.0%.
• U.S. unemployment ticked up in June to 4.1%, compared to 4.0% in May and 3.6% a year earlier. The number of unemployed Americans grew 11% year-over-year to 6.8 million. Weekly jobless claims also grew more than expected in early June, pushing claims up to a ten-month high.
• Housing starts fell 5.5% in May, their lowest level since June 2020. The positive momentum in the housing market from earlier in the year was slowed by a surge in mortgage rates, which hit a six-month high of 7.2% in early May. Confidence among homebuilders also hit a six-month low in June, with the National Association of Homebuilders stating that persistently high mortgage rates are keeping many prospective homebuyers on the sidelines.
• There are numerous geo-political risks around the world that, if they intensify, could have negative impacts on the global economy. These include the conflicts in the Middle East, tensions between China and its neighbors, and the ongoing war between Ukraine and Russia. Any of these conflicts could expand and have broad implications for global energy prices, trade relations, and world economies.
• And of course, there is the U.S. Presidential election in November. While there is much angst and uncertainty surrounding this election, what we know from history is that it is not likely to have a long-term impact on the markets.
• Our outlook for the economy and markets in 2024 remains cautiously optimistic. While the U.S. economy could slow in the nearterm, our long-term outlook is for the economy to grow at a solid pace and for corporate earnings to continue to rise, both of which should be positive for long-term stock returns. Other positive factors could include the resolution of geo-political conflicts, an economic recovery in China, and inflation and interest rates in the U.S. easing faster than expected, all of which would provide additional tailwinds for stocks. Finally, the continued adoption of artificial intelligence across numerous industries and applications is expected to drive long-term growth and productivity in the U.S. economy.
• With respect to valuation, the broad S&P 500 index can be considered fully valued at approximately 21 times forward 12-month earnings, slightly above its 5-year average of nearly 19 times. However, not all stocks or sectors are fully valued, as there is a wide dispersion of valuation multiples across sectors and companies. We continue to look for and find pockets of opportunity, particularly in sectors which have lagged the overall market and are thus more attractively priced.
• We expect value-oriented stocks, dividend-paying stocks, and other income-oriented securities to benefit from a broadening market rally and potentially lower interest rates in the future. In the meantime, we still find short-term Treasury bills and high-yielding money market funds attractive places to park cash at risk-free annualized yields around 5%.
• Overall, we maintain a positive long-term outlook for the U.S. economy and markets, and we believe our patient, disciplined approach to individual security selection offers our clients strong long-term return potential in a cost effective and tax efficient manner.

The Edgemoor Team

July 2024

In this latest installment of our newsletter, we share our observations of the markets and the economy in the first quarter of 2024. Click here to go to the full report on our website.  Following are the highlights:

• The stock market carried its strong momentum from late 2023 into the first quarter of 2024, driving most equity market indices to record highs. 
• The S&P 500 Index posted a 10.6% total return for the first quarter, its best first quarter since 2019.  The index peaked at 5,253 late in the quarter, a level which many analysts had predicted might not be reached until the end of 2024. 
• The stock market was bolstered by the combination of a resilient U.S. economy, solid corporate earnings, continued strong momentum in the tech sector, and a broadening of the rally into sectors like financial, energy, and industrials, which had been largely left behind in last year’s rally.
• The bond market reversed gains from the fourth quarter of 2023, posting a negative 0.8% total return in Q1 2024, as a slight increase in interest rates caused bond prices to fall. 
• The Federal Reserve held its benchmark Fed Funds rate steady at 5.25% – 5.5% during the first quarter, but benchmark Treasury yields began to tick higher in March, with the 10-year Treasury yield notching a year-to-date high of 4.3%, as expectations for significant rate cuts in the first half of 2024 began to fade.
• The Fed’s cautious stance on cutting rates early in 2024 came after two consecutive elevated inflation reports in January and February.  The Consumer Price Index, or CPI, rose 3.1% year-over-year in January and 3.2% in February, exceeding expectations.  Note:  The March CPI reading came out after quarter-end and also surprised to the upside, posting a 3.5% year-over-year increase. Core CPI, which excludes volatile food and energy prices, also remained elevated at 3.8% in March, matching its 3.8% reading in February.
• Absent a meaningful reversal in the core inflation rate to a level closer to the Fed’s target 2% rate, it seems likely that the Fed will remain cautious about cutting interest rates until at least the latter part of 2024.
• Overall, the U.S. economy has remained remarkably resilient, characterized by continued low unemployment, strong GDP growth, and solid corporate earnings.
  • The U.S. unemployment rate fell to 3.8% in March from 3.9% in February, remaining consistently in the sub-4% range as it has for the past 25 months. 
  • U.S. GDP grew at an annualized rate of 3.4% in the fourth quarter of 2023 and is currently projected to top 2.8% in the first quarter of 2024, according to the Atlanta Fed’s GDPNow tracker. 
  • Corporate earnings have also exceeded expectations, with fourth quarter S&P 500 Index earnings growing 4% quarter-over-quarter and 7% year-over-year.  Earnings are currently expected to accelerate 6.5% for the first quarter and increase 12.5% for the full year 2024, according to S&P Global. 
  • U.S. productivity has also showed gains, increasing 3.2% in the fourth quarter, significantly higher than the 1.5% average productivity increase over the past decade. 
  • Overall, these factors point to an economy that is making the “soft landing” that the Fed was hoping for, but which many were skeptical could be achieved.
• Our outlook for the economy and markets in 2024 remains cautiously optimistic.  We believe that if the economy continues to grow at a solid pace and corporate earnings continue to rise, then stocks should extend their gains this year. 
• There are numerous risks to the “soft landing” outlook, including the risk that the ongoing wars in Ukraine and the Middle East will spread into broader conflicts, and that geopolitical tensions with China continue to worsen.  Closer to home, the robust March jobs report heightened the risk that the Federal Reserve could further postpone interest rate cuts, which could dampen economic growth and derail the stock market.  In addition, continuing partisan gridlock on Capitol Hill and the 2024 election cycle also have the potential to disrupt markets in the short term.
• As far as valuation, the broad S&P 500 index can be considered fully valued at 21.8 times forward 12-month earnings, above its 5-year average of 18.8 times.  However, not all stocks or sectors are so fully valued, and we continue to look for and find pockets of opportunity, particularly in sectors which have lagged the overall market and are thus more attractively priced. 
• We expect value-oriented stocks, dividend-paying stocks, and other income-oriented securities to benefit from a broadening market rally and potentially lower interest rates in the future.  In the meantime, we still find short-term Treasury bills and money market funds attractive places to park cash at risk-free annualized yields above 5%.
• Overall, we maintain a positive long-term outlook for the U.S. economy and markets, and we believe our patient, disciplined approach to active security selection offers our clients strong long-term return potential in a cost effective and tax efficient manner

The Edgemoor Team

April 2024