Edgemoor Investment Advisors is honored to have been ranked #5 on CNBC’s 4th annual Financial Advisor 100 list, which ranks and recognizes the top investment advisors in the country. To learn more about the methodology and the other firms on this year’s list, check out CNBC.com/fa100. This year Edgemoor moved up 21 spots to #5 in 2022 after ranking #26 in 2021. You can read the announcement here.
In this latest installment of our quarterly newsletter, we share our observations on the third quarter of 2022 and our outlook for the remainder of the year. Click here to go to the full report on our website. Following are the highlights:
- The most important message of our newsletter this quarter is not to panic. While both the stock and bond markets are down significantly so far this year, there are several important underlying strengths in the U.S. economy and financial markets. We will discuss all these factors – both good and challenging – in this report. In the meantime, our best advice to our clients is to be disciplined and patient.
- The third quarter, ended September 30th, 2022, was marked by continued volatility in both the stock and bond markets.
- Stubbornly high inflation and accelerated interest rate hikes by the Fed caused markets to sharply reverse course in September after a short relief rally in July and August.
- The S&P 500 Index was down 4.9% for the quarter and stayed in bear market territory for the year, with a negative total return of 23.9%. The tech-heavy NASDAQ fared even worse, down 32% year-to-date.
- The bond market, as measured by the Barclay’s Aggregate Bond Index, also posted negative returns, falling 4.8% in the quarter and 14.6% for the year, as rising interest rates caused bond prices to fall sharply. It was the worst year-to-date performance for the bond market in U.S. history.
- Despite these headwinds, the U.S. economy remained sturdy, albeit slowing through the third quarter. Robust job and wage growth, combined with resilient consumer spending, formed the underpinnings of a still healthy economy.
- Corporate earnings, a key economic indicator for most investors, also continue to show positive growth, though at a slower rate than earlier forecasts.
- Energy prices fell to their lowest level since January, with crude oil prices falling 14% in the third quarter and nearly 40% from their 52-week high.
- Challenges do lie ahead. U.S. GDP growth was negative in the first and second quarters of 2022. Two consecutive quarters of negative GDP growth is often an indicator of recession, though current sentiment is that the U.S. did not enter a recession in the first half of the year due, in part, to the continuing strong labor market. We await the third quarter GDP number to see if it proves this out, as current forecasts are for modestly positive growth in the quarter.
- While there are clear signs that U.S. economic growth is slowing, the question is whether this slowdown is a prelude to recession. A key determinant of that may be the Federal Reserve’s rate actions over the next few months.
- Federal Reserve Chairman Jerome Powell has emphatically reiterated the Fed’s commitment to bring inflation under control, despite the short-term pain it inflicts on the economy. After three 75-basis point hikes in the short-term fed funds rate so far this year, the Fed has indicated that another two hikes are likely before year-end 2022. That would bring the target fed funds rate to 4.25%-4.5% by year-end from near zero at the start of the year.
- In the meantime, investors have the first opportunity in years to earn attractive yields on ultra-safe Treasury bonds. We recently purchased short-term Treasury bonds yielding 4.25% and a short-term Treasury bond ETF currently yielding 2.8% (which resets monthly to a potentially higher yield) for client accounts with available cash. We will continue to look for similarly safe and attractive income opportunities, including short-term, high-quality corporate bonds, for the income portions of client portfolios.
- Economies and markets outside the United States have struggled even more than the U.S. The ongoing war in Ukraine, which triggered a European energy crisis, has roiled European economies, while China’s zero Covid policy, combined with a troubled real estate sector, have stunted growth there.
- We have a cautious outlook for U.S. stocks in the near term, as we expect markets to remain volatile through year-end as uncertainties about interest rates, inflation, and other global challenges weigh on investors.
- But the outlook for stock market returns over the next 3-5 years is now much brighter than in recent years due to lower current valuations. The S&P 500’s forward price-to-earnings ratio stood at 15.8x at the end of the third quarter, compared to 23x last year and a 5-year average of 18.6x.
- Despite the pain of a market downturn, it is normal and healthy for markets to recalibrate themselves every few years. Investors who stay patient and disciplined with their investment plan should be rewarded over time.
- We are confident that new opportunities will emerge in select equity and income categories, offering the potential for attractive, long-term positive returns over a full market cycle.
The Edgemoor Team
