In this latest installment of our quarterly newsletter, we share our observations on the second 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 second quarter of 2022 saw a continuation of the negative momentum that began in the first quarter.  Rising inflation and interest rates, as well as slowing growth in the U.S. and abroad caused sharp retreats in both the stock and bond markets.
• The S&P 500 index posted a negative total return of 16.5% in the second quarter, putting it in bear market territory for the year with a negative return of 20.0%.  The tech-heavy NASDAQ fared even worse, down 22.4% for the quarter and down 29.5% year-to-date.  This marks the worst first half of the year for equity markets in nearly fifty years.
• The bond market, as measured by the Barclay’s Aggregate Bond Index, also posted negative returns, falling 4.7% in the quarter and 10.3% for the year, as rising interest rates caused bond prices to fall at a rate that exceeded their interest payments.
• A major contributor to market volatility has been the sharp rise in inflation in the U.S. this year.  In June, the Consumer Price Index, or CPI, the primary measure of inflation, soared 9.1%, an unexpected increase from the 8.6% rate in May.  It was led by sharp increases in energy prices (up 42%) and food prices (up 10%) and is the highest level of inflation since November 1981.
• This will likely prompt the Federal Reserve to continue its aggressive interest rate tightening by raising the fed funds rate another three-quarters to one percent this month, on top of the three-quarters percent increase in June, which was the largest monthly increase in short-term interest rates since 1994. 
• Despite the numbers, it can be argued that we may be at or near a peak in inflation.  Energy prices, which contributed roughly half of the June increase, have declined substantially since then, with crude oil prices dipping below $100 per barrel in July, the first time since early May. 
• In addition, the core inflation index, which strips out volatile food and fuel prices, slowed slightly to 5.9% in June from 6.0% in May and 6.2% in April.
• If all of this is sustained, we believe it could bring down overall inflation in the coming months and reduce pressure on the Fed, allowing it to slow future rate increases.
• The economic debate has shifted from whether the economy will slow this year to when – and for how long – it could move into recession.  A recession is generally defined as two consecutive quarters of negative GDP growth.
• U.S. GDP shrank at an annual rate of 1.6% in the first quarter, the first contraction since the onset of the pandemic in early 2020.  Estimates for the second quarter GDP range from negative 1% to positive 3% growth.
• While we would rather not see a recession, the silver lining in a recession scenario is that an earlier recession means an earlier recovery.  In other words, the sooner a recession arrives, the sooner inflation pressures will ease, and the less the Fed will have to tighten.
• Consensus estimates for 2022 corporate earnings have so far remained little changed, forecasting better than 10% earnings growth for this year, despite the fact that 70% of the companies that have issued guidance for the second quarter have trimmed their earnings estimates.  We will be watching carefully how this earnings season unfolds and would not be surprised to see a downward revision in consensus estimates for full year 2022 earnings. 
• Given this backdrop, our near-term outlook is for the market to remain volatile into the second half of the year.  Continuing uncertainty around inflation, interest rates, and the geopolitical risks in China and Ukraine are likely to keep investors jittery.
• But longer term, our outlook remains optimistic. Pillars of strength in the U.S. economy include continuing low unemployment, positive, albeit slowing, annual GDP growth, and strong corporate and consumer balance sheets. 
• Our investment approach remains unchanged: don’t panic; don’t sell good investments at depressed prices; and maintain a long-term, disciplined approach to investing in high quality companies that can withstand market downturns.
• We also continue to take an active approach to individual security selection and remain committed to our long-term, value-oriented investment philosophy.
• Overall, it is a challenging time for all investments, but we remain committed to selecting equity and income securities with the potential for attractive, long-term positive returns over full market cycles.

The Edgemoor Team

In this latest installment of our quarterly newsletter, we share our observations on the first 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 highlights:

• Equity markets had a rough start to the year.  Fears of high inflation and rising interest rates, combined with the geopolitical shock of Russia’s invasion of Ukraine, sent the S&P 500 index into correction territory in late February, its first such correction since the onset of the pandemic in March 2020.  For the quarter, the S&P logged a return of negative 4.6% through March 31, 2022. 
•  The bond market also posted losses, with the benchmark Bloomberg Barclay’s Aggregate U.S. Bond Market index down 5.9% for the quarter, as falling bond prices exceeded the return of the interest payments on low-yielding bonds.
• Russia’s invasion of Ukraine in late February shocked the world and shifted investors’ focus momentarily from inflation and interest rates to geopolitics. Although Russia accounts for less than 2% of global GDP, it is a major producer of oil, natural gas and other commodities, prices of which have been rising sharply since February. 
• U.S. consumers suddenly were faced with skyrocketing gas prices at the pump and food prices in the grocery store.  The U.S. Consumer Price Index, or CPI, the broadest measure of inflation, increased at an annualized rate of 8.5% in March, its highest rate in four decades.
• The Federal Reserve Bank’s primary tool to combat rising inflation is to raise short-term interest rates. In response to recent trends, the Federal Reserve took the long-anticipated action of raising the short-term fed funds rate at its March meeting, hiking the rate by a quarter percentage point to a range of 0.25% to 0.50%, its first rate increase since 2018. 
• The odds now favor a 0.50% hike in the fed funds rate in May, followed by another 3-4 half-point increases before the end of the year. This will have an especially dampening effect on consumers who carry credit card debt, auto loans, and home mortgages.
• Despite all the uncertainties, the U.S. economy remains solid by most measurements, albeit slowing.  Real U.S. GDP growth is forecast to be 3.3% for 2022, down from 5.7% in 2021, but above the historical average of the last twenty years. 
• U.S. unemployment hit a post-pandemic low of 3.6% in March 2022, down from a high of 14.7% in April 2020.  As unemployment has declined, wages have continued to climb, rising 5.6% year-over-year in March, the largest increase in decades.
• U.S. corporate earnings, which are the major driver of stock market performance, continue to show a steady recovery from the pandemic low point.  Consensus estimates for 2022 are for S&P 500 earnings to grow 9% to $227 per share, from $208 per share in 2021.
• While we expect market volatility to continue in the near term, we remain cautiously optimistic that the U.S. economy will post positive growth this year, corporate profits will increase, and the U.S. stock market will continue to move higher.
• Our response to current market and economic conditions is to stay the course with high quality, value-oriented, dividend-paying equity and income investments through our disciplined process of individual security selection. We continue to avoid long-term, fixed-rate bonds, which are particularly vulnerable to rising interest rates.

The Edgemoor Team

In this latest installment of our quarterly newsletter, we share our observations on the fourth quarter and full year of 2021 as well as our outlook for 2022.  Click here to go to the full report on our website.  Following are highlights:

• 2021 was an outstanding year for equity investors.  Combined with strong returns in 2020 and 2019, it marked the S&P 500’s best three-year run since the mid-1990’s.  The S&P 500 index returned 28.7% for the year, on top of gains of 18.4% in 2020 and 31.5% in 2019.  And most of this occurred during a global pandemic, now going on its third year.
• The reopening of the economy in the spring of 2021, combined with increasing consumer confidence, robust corporate earnings, and accommodative monetary and fiscal policies, caused the markets to soar to new heights. 
• The markets were even able to largely shrug off two new waves of Covid-19 variants, Delta in July/August, and Omicron in November/December, with a particularly noteworthy surge in the fourth quarter.
• We did, however, start to see a rotation by investors out of the high-growth stocks, which have long-dominated the market, into more defensive, value-oriented segments.  Rising interest rates through the year had the effect of discounting the value of future growth prospects for many high-growth businesses, a trend we have seen accelerate into the new year.
• Rising rates also negatively impacted bonds, whose prices move inversely to interest rates.  For the year, the Barclay’s Aggregate Bond Index returned a negative 1.5%, the first negative-return year for bonds since 2013.
• The Consumer Price Index (CPI), regarded as the broadest measure of inflation, soared to an annualized rate of 7.0% in December, far exceeding consensus expectations.  This surge in prices appears to be less transitory, and part of a more long-term inflationary cycle than originally anticipated.
• To combat this, the Federal Reserve signaled in its most recent FOMC meeting that it intends to accelerate the tapering of its bond purchases and begin to hike interest rates, with three rates hikes indicated for 2022.
• A rise in rates does not necessarily signal the end of the bull market. We do anticipate, however, that the headwinds presented by tighter monetary policy will lead to increased market volatility.
• As we consider the new year, we believe stock returns in 2022 will again be driven by growing corporate earnings.  The U.S. economy should continue in its mid-cycle recovery, marked by sustained expansion with moderate GDP growth, low unemployment, and solid corporate profits. 
• On the other hand, we would not be surprised to see continued market volatility and even a market correction in 2022.   Typically, corrections occur about once every year or two and we have not had a correction since the COVID-induced bear market in the spring of 2020.  It seems likely that we will have a correction over the next year or two and we believe that the market will regain the losses from a correction within a few months, which is what usually occurs.
• We do not anticipate any major changes to our investment strategy, and we are actively pursuing new investment opportunities in areas we see as favorably positioned, like infrastructure and financial stocks.  On the income side, we continue to favor dividend-paying securities like utilities, telecom, and real estate investment trusts, over fixed-rate bonds and Treasury securities.
• Overall, we believe in the durability of the broadly diversified portfolios we construct for our clients, and we expect them to perform well through a full market cycle.

Happy New Year from the Edgemoor Team!

In this latest installment of our quarterly newsletter, we share our observations on the third quarter of 2021 and our outlook for the remainder of the year. Click here to go to the full report on our website.  Following are highlights:

• The third quarter of 2021 began with renewed hope for the return to some “normalcy,” but the rise of the highly contagious Delta variant of COVID-19 over the summer created some setbacks.
• U.S. real GDP growth surged in the first two quarters of 2021, at 6.3% and 6.6%, respectively.  Although GDP is expected to slow to 5.5% in the third quarter and 3.9% in the fourth, the rate of economic growth in the United States remains strong.
• The U.S. unemployment rate, which peaked at 13.1% in the second quarter of 2020, has fallen steadily to 4.8% in September 2021 and is projected to decline further to 4.0% in 2022. 
• Wage growth is also at its highest in two decades, as employers have had to compete for fewer workers due to pandemic-related retirements and work disincentives from Federal relief payments, among other factors.
• Still, there are economic headwinds which accelerated during the third quarter.  Supply chain disruptions, particularly in the semiconductor and energy sectors, continue to ripple through the economy.  The surge in demand over the last year, for everything from homes to cars to appliances, has resulted in logistical bottlenecks and supply shortages around the globe.  Although we expect these supply chain disruptions to ease in the coming months, they have already led to a noticeable spike in inflation in many sectors.
• Core CPI, which strips out more volatile food and energy prices, rose to 4.0% year-over-year in September, though it is expected to decline to a more moderate 2.5% in 2022 as supply-demand metrics come more into balance.
• After surging 103% from its pandemic low point 18 months ago, investors saw the S&P 500 take a pause in the third quarter of 2021.  The total return for the S&P in the third quarter was just 0.6%, compared to 6.2% in the second quarter.  For the month of September, the index declined 4.7%, the first negative return month in 2021.  Despite the pullback in September, the S&P 500 was still up an impressive 15.9% year-to-date, reflecting the fundamental strength of corporate earnings and the overall economy.
• Overall market volatility, as measured by the CBOE Volatility Index, or VIX, hit a high of 25.7 in mid-September, its highest level since March of 2021.  Driven largely by fears of higher interest rates and rising inflation, market volatility seems likely to stick around for the near term.
• The Federal Reserve signaled in September that it will likely begin tapering its $120 billion monthly bond purchasing program by the end of 2021, rather than in early 2022.  This accelerated timetable, though widely expected, boosted Treasury yields back above 1.6% for the first time since May 2021.
• In addition to monetary policy, fiscal policy has been a key feature of the economic recovery in the United States.  From the massive fiscal stimulus measures passed by U.S. lawmakers during the pandemic, to the current proposed infrastructure legislation being debated in Congress, U.S. consumers and U.S. businesses have benefited greatly from increased government spending. 
• Where fiscal policy goes from here remains unclear.  While the bipartisan $1 trillion infrastructure bill seems likely to pass, the larger $3.5 trillion human infrastructure bill seems destined for significant cuts, due to concerns over exploding government deficits and debt.
• The Biden tax proposals, which are designed to raise revenue to pay for his infrastructure bills, also face great uncertainty.  However, all signs point to higher taxes for high income earners.  The good news is that the current proposal does not include an elimination of the step-up in cost basis, which protects inherited appreciated assets from capital gains taxes.
• In our view, the outlook for U.S. equities remains positive. Stock valuations are elevated but not unreasonable given a backdrop of low interest rates and strong corporate earnings.  We believe a continuation of economic expansion should underpin stocks as we move through the rest of this year and into 2022. 
• We continue to manage client portfolios with a cautious eye toward rising rates and inflation.  We also continue to look for pockets of value in an otherwise fully valued market.  Fortunately, we are still able to find both equity and income investments that we believe will provide solid returns over the long term.
• We are pleased to announce that Steve LaRosa, CFA, has joined Edgemoor as a Director and Senior Portfolio Manager. Steve has more than 20 years of experience as an investment advisor. Most recently, Steve was a Senior Portfolio Manager at Bank of America Private Bank, where he was responsible for managing over $1 billion in client assets. Please join us in welcoming Steve to the Edgemoor team.

The Edgemoor Team

In this latest installment of our quarterly newsletter, we share our observations on the second quarter of 2021 and our outlook for the remainder of the year. Click here to go to the full report on our website.  Following are highlights:

• The U.S. economy and financial markets accelerated their recovery in the second quarter of 2021 from the Covid-19 pandemic that kept Americans and the world in its grip for more than 15 months.
• Several factors have contributed to the robust recovery.  First, increasing vaccination rates in most parts of the U.S. have led to the easing of pandemic-related restrictions, which in turn have boosted economic activity and consumer spending.  Second, the Federal Reserve has remained committed to low interest rates and accommodative monetary policies, spurring everything from home purchases to corporate investment.  Finally, government stimulus appears to be continuing with a bipartisan infrastructure spending program likely to pass in Congress.
• The pace of the economic recovery has been faster and stronger than expected, with the Fed revising its estimates for 2021 GDP growth upward from 4.2% in December to 6.4% in March and to 7% by mid-June.  Some economists are even more bullish, predicting that GDP could grow at an annualized rate of 8% – 9% this year. 
• The strong uptick in economic activity has led to a robust rebound in corporate earnings, which increased 143% in the first quarter of 2021 from the pandemic low-point of the first quarter of 2020 and are expected to top 65% year-over-year growth in the second quarter.
• All of these factors have fueled stock market gains of 15.3% for the S&P 500 year-to-date through June 30^th, with most stock indices reaching record highs at the end of the quarter.
• The employment picture has also brightened in 2021.  After a blockbuster employment report in March, job growth slowed in April but recovered in May and June, sending the unemployment rate down to 5.9%. However, in a frustrating twist to employers, job postings are at record levels even as nine million Americans remain unemployed, meaning many businesses can’t fill the positions they need to return to full capacity. 
• As the U.S. economy comes back from the depths of the pandemic, many investors now see inflation as the next serious risk to the economy and markets.  Stoking this fear, consumer prices rose at an annualized rate of 5.4% in June, marking a 13-year high.
• However, the Fed has remarked that the current burst of inflation, seen especially in rising commodity, energy, and other raw material prices, is likely to be transitory, lasting only until global supply chains recover and the supply/demand relationship for most goods and services comes more into balance.
• Fears of inflation have also put the spotlight on interest rates; specifically, how and when the Fed might respond by raising rates and curtailing asset purchases. Given its view that current inflationary pressures are transitory, the Fed has not indicated any material change to its monetary policy, meaning that it does not expect any rate hikes to be needed until 2023.
• We remain optimistic that the U.S. economy and financial markets will continue their positive trajectory through 2021 and into 2022 as businesses and consumers continue to recover from the Coronavirus pandemic. Overall, the combination of pent-up consumer demand, supportive monetary and fiscal policies, improving business and consumer confidence, and reopening momentum provide a favorable backdrop for continued growth in the U.S. economy and financial markets.
• We do not anticipate major changes to our portfolios as a result of current trends.  We continue to hold and to look for attractively priced investments that might benefit from infrastructure spending and the broader economic recovery, which have the potential to boost value stocks, in particular.  Rising interest rates do not concern us now, but we will be keeping a close eye on yields and signs of an uptick in inflation.
• We are pleased to announce that Edgemoor’s office has fully re-opened as of June 1^st, 2021.

The Edgemoor Team