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

In this latest installment of our newsletter, we share our observations of the markets and the economy in 2023 and our outlook for 2024. Click here to go to the full report on our website.  Following are the highlights:

• Investors found much to celebrate as 2023 came to a roaring close.  The market’s positive momentum accelerated in the fourth quarter, sending all major stock indices at or near record highs in December. 
• Bolstered by the combination of a solid economy, better-than-expected corporate earnings, and the anticipated end to the Federal Reserve’s long rate-tightening cycle, stocks rallied strongly in the 4th quarter to finish out the year on a high note.  It was a significant reversal of the pessimism many investors felt at the start of the year.
• The S&P 500 index posted an 11.7% total return for the fourth quarter – its best quarterly performance since late 2020 – and an impressive 26.3% total return for the year.
• The Bloomberg Barclay’s Aggregate Bond Index erased a modestly negative return for the first nine months of the year, rallying in the fourth quarter to post a positive 5.5% total return for the full year 2023, avoiding what could have been a third straight year of losses for bonds.
• Driving the late-year rally of both stocks and bonds was investor optimism that, in addition to ending rate hikes, the Fed may start to cut interest rates sooner than expected. 
• After maintaining a stance for months that investors should not expect rate cuts anytime soon, the Fed released new economic projections in mid-December that suggested the possibility of three rate cuts in 2024. 
• The primary rationale for the Fed’s pivot on rates has been the decline of inflation from its peak in June 2022.  Overall, inflation has cooled considerably from its peak of 9.1% in June of 2022 to a reading of 3.4% in December 2023.  If it continues its downward trend, it will support the narrative that the Fed should be able to “give back” some of its interest rate hikes sometime in 2024.
• The U.S. economy has remained remarkably resilient, particularly in the face of calls by many at the start of the year for an inevitable recession.  Instead, the U.S. economy has been characterized by continued low unemployment, strong GDP growth, and solid corporate earnings.
• Our outlook for the economy and markets in 2024 is cautiously optimistic.  If the economy continues to grow at a solid pace and corporate earnings continue to rise, then the stock market should rise further in 2024. 
• As far as valuation, the broad S&P 500 index is fairly valued at 19.3 times forward 12-month earnings, roughly in line with its 5-year average of 18.8 times.
• We have and will continue to find opportunities for our clients, particularly in sectors which have lagged the overall market and are thus attractively priced.  We expect value-oriented stocks, dividend-paying stocks, and other income-oriented securities, like utilities and REITs, to benefit from a broadening market rally and potentially lower interest rates in the future.
• In the meantime, we are still favoring short-term Treasury bonds and money market funds at better than 5% annualized yields for client cash.
• 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

In this latest installment of our newsletter, we share our observations of the markets and the economy in the third quarter of 2023. Click here to go to the full report on our website.  Following are the highlights:

• The S&P 500 index maintained a strong 13.1% total return through September 30th, 2023, despite recent market volatility.  The Bloomberg Barclay’s Aggregate Bond Index, on the other hand, has notched a modestly negative return of 1.2% year-to-date.
• In the third quarter, both indices posted negative total returns, reversing course following two quarters of gains. The S&P 500 posted a negative 3.3% total return in Q3, while the bond index returned negative 3.2% for the quarter.
• Much of the downturn in stocks and bonds came in September, with the S&P down 4.8% and the bond index down 2.5% for the month.  This was a rapid reversal for markets, even for the month that is historically the worst for equities.
• A major contributor to the market selloff in Q3 was the rapid rise in Treasury yields since mid-summer.  The benchmark 10-year Treasury bond reached its highest yield in nearly 16 years in late September, at nearly 4.6%.  This marked a dramatic increase from its yield of 3.75% at the end of June 2023. 
• The surge in Treasury yields came in reaction to the Federal Reserve’s latest statement that interest rates may need to stay higher for longer to bring inflation back to its target rate of 2%.  This resolve to quell inflation disappointed investors, who had hoped for a quick pivot by the Fed to cut rates in late 2023, after it paused rate hikes in June and September.
• Looking ahead into 2024, investors are currently expecting a half-point reduction in the fed funds rate by late next year, down from the one-point cut anticipated by many earlier in the summer. 
• The U.S. economy has remained remarkably resilient during the Fed’s rapid rate-hiking campaign over the last 18 months.  Bolstered by a still-robust labor market, solid consumer spending, and-better-than expected corporate earnings, the U.S. economy has so far averted the long-awaited recession that many had predicted for 2023.
• U.S. GDP growth – a key measure of the health of the overall economy – was a solid 2.1% in the second quarter ended June 30^th and is now predicted by the Atlanta Fed’s GDPNow model to top 3.5% for the third quarter. 
• The labor market also remains seemingly bulletproof.  U.S. businesses have added more than 200,000 jobs in each of the last three months, including September’s blow-out number of 336,000 new non-farm payrolls, a massive surprise to the upside from the consensus estimate of 170,000. 
• However, inflation remains elevated in the U.S., despite dropping significantly from its recent highpoint in June 2022.  The Consumer Price Index, or CPI, which is the broadest measure of inflation, held steady at 3.7% in September, but remained above July’s 3.3% rate for the second month in a row. 
• S&P 500 earnings are also projected to be flat year-over-year in Q3, after three straight quarters of declines for the index.
• Global growth has also faltered, with both China and the eurozone facing sputtering economies.
• Given all these uncertainties, our outlook for the economy and markets is mixed. We remain cautiously optimistic on equities but are concerned about the lack of corporate earnings growth this year. 
• Longer term, our outlook for earnings growth and the markets remains positive due to several structural tailwinds, including ongoing technological advancements, increasing worker productivity, widening consumer demand globally, as well as breakthroughs in the biotech and healthcare industries.
• In terms of portfolio implications, the market’srecent re-pricing in September and early October has presented some new pockets of opportunity, which we are actively evaluating. The write-up of Schwab in this report is an example of such an opportunity which we identified earlier this year.
• In the meantime, we are still favoring short-term Treasury bonds and money market funds at better than 5% annualized yields for client cash.

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 2023. Click here to go to the full report on our website.  Following are the highlights:

• Stock and bond markets continued their upward march in the second quarter ended on June 30, 2023, adding to gains posted in the first quarter and defying expectations by many for weaker market returns at the start of the year.
• The S&P 500 Index posted an 8.7% total return in Q2, putting the broad stock market index up 16.9% for the year-to-date period. The Bloomberg Barclay’s Aggregate Bond Index, which was slightly negative in the second quarter, is still up 2.1% so far this year.
• The strong performance of stocks sent the S&P 500 Index into a technical bull market, defined as a 20% rise off its October 2022 low, and marked the end of the bear market that began in January 2022.
• Overall, the U.S. economy remains steady, with the labor market strong, inflation easing, consumer confidence rising, and economic growth still positive.
• Employers added 209,000 jobs in June and the unemployment rate remained low at 3.6%. Inflation continued to ease in June, with the CPI up just 3% year-over-year, a significant slowdown from its high point of 9.1% in June of 2022. Consumer confidence jumped to a 17-month high in June, reflecting the slowdown in inflation and fewer worries about a recession. GDP growth is currently estimated to be 1.8% in the second quarter, down slightly from the revised 2% growth rate in the first quarter, but still positive.
• That said, some signs of slowdown are emerging. Jobless claims started to tick up in May, though they made an unexpected drop in mid-June. While the services sector continues to expand modestly, the manufacturing sector has remained in contractionary territory for eight consecutive months. And overall inflation remains above the Fed’s 2% target rate.
• The U.S. Federal Reserve held interest rates steady at its June meeting, maintaining its Fed funds policy target of 5.0% – 5.25% and putting its aggressive rate hikes over the last fifteen months on what some termed a “Hawkish Hold.” This means that despite the pause, the Fed expects stronger growth and persistent inflation in the months ahead, which will likely mean additional rate hikes before year-end.
• Looking ahead, the spotlight is now on corporate earnings and overall market liquidity as major factors in determining the course of the U.S. economy and markets in the second half of 2023.
• Given all these uncertainties, our outlook for the economy and markets is mixed.
• We remain cautious on equities in the near term, though our longer-term outlook is positive. The 12-month forward price/earnings ratio (P/E) for the S&P 500 Index is 19 times, which is above both the 5-year and the 10-year averages.
• In addition, this year’s equity market rally has been largely concentrated in just seven high-flying technology stocks, including many we own, namely Apple, Amazon, Microsoft, and Google. A narrow market like this tends not to have the longevity of a more broad-based rally, causing some concern for investors.
• And although aggressive rate hikes may be behind us, we expect to remain in a higher-for-longer interest rate environment until inflation cools and the labor market softens.
• We continue to look for and find some pockets of opportunity in today’s market (see our new investment write-up on Thermo-Fisher Scientific in the final section of this report). In addition, we continue to deploy uninvested cash in short-term Treasuries and money market funds at attractive, low risk, annualized yields at or above 5%.
• We believe that our patient, disciplined approach to active security selection gives our clients better long-term return potential in a cost effective and tax efficient manner.

The Edgemoor Team