In this latest installment of our quarterly newsletter, we share our observations on the fourth quarter of 2020 and our outlook for 2021. Click here to go to the full report on our website.  Following are highlights: 

• We have finally left 2020 behind, and what a year it was. A global pandemic, the ensuing economic fallout, social unrest across the United States, and a contentious election combined to make a year that we will always remember. 
• One of the most perplexing elements of the year was the seeming disconnect between the strong performance of the stock market and the sputtering economy. The S&P 500 index marched upward throughout the fourth quarter, continuing the surge since the market bottomed in March 2020. The index gained 12.1% in the quarter to finish the year up 18.3%, including dividends, despite its sharp decline in March.  Bonds rose slightly in the fourth quarter, with the Bloomberg Barclays U.S. Aggregate Bond Index gaining 0.7% and ending the year up 7.5%.  
• Many parts of the economy painted a different story: 
  • Hiring slowed in the fourth quarter, continuing the monthly trend since June, and the labor picture weakened at year end as the United States lost jobs in December, the first decline since the spring. The unemployment rate dropped to 6.7%, a big improvement from the 14.7% peak in April; however, this rate is still nearly double the level in February, and there are many who have left the workforce and are no longer counted among the unemployed. 
  • We expect gross domestic product increased about 5% in the fourth quarter of 2020, following the large swings down and up in the second and third quarters, respectively. 
• We are optimistic that 2021 will bring much needed improvement to the global health situation and our economy, however, many challenges remain: 
  • The storming of the Capitol on January 6th by an angry mob trying to prevent certification of the election results put a spotlight on the deep political divisions in the United States. 
  • The pace of rehiring furloughed and laid off employees who are still on the sidelines is a major concern. The longer these workers stay unemployed, many of whom are in the hard hit retail and hospitality industries, the more difficult it will be for them to return to the workforce. 
  • We expect to see a drop of about 9% in fourth quarter S&P 500 corporate earnings compared to the fourth quarter of 2019, which would be slightly worse than the roughly 6% decline in the third quarter due to the resurgence in the fourth quarter of COVID-19 cases. 
• The combination of the stock market’s rise and a decline in earnings has led to an increase in the S&P 500 index’s forward price/earnings ratio to about 22.6, higher than historical averages. We believe stocks may take a breather as earnings catch up.  
• But, the anticipation of greater government spending from the new Administration and still low bond yields should support stocks longer-term, as well as encourage lending and corporate investments that should boost economic activity. 
• We expect economic growth to continue at a moderate pace through 2021, and as it becomes safer to be exposed to others and gather in groups, consumers should resume travel, dining, and entertainment activities that they have shunned for fear of contagion. There is great pent up demand for these and other services, and the spending should boost economic growth. 
• Progress with vaccinations will be important to the economy, not to mention human health. The approval and production of several vaccines brings hope for an end to the global COVID-19 pandemic, but the monumental logistical challenges of widespread vaccination have resulted in a slow start.  But, we believe that a significant portion of the U.S. population will receive a vaccine by this summer, hopefully bringing the disease largely under control by the end of the year.  
• We do not anticipate major changes to our portfolios as a result of current trends, but we are looking for investments that might benefit from infrastructure spending and broader economic recovery, which have the potential to boost value stocks, in particular. Rising yields do not concern us now, but we will be keeping a close eye on yields and any signs of an uptick in inflation. 

The Edgemoor Team. 

In the latest installment of our quarterly newsletter, we share our observations on the third quarter of 2020 and our outlook.  Click here to go to the full report on our website.  Following are highlights:

• For the third quarter, the S&P 500 index returned 8.9% including dividends and ended September up 5.6% for the year.
• We have been both impressed and a bit surprised by the stock market’s resilience.  While we did expect stocks to recover from their initial drop, the rally continued steadily for months despite worrisome signs during the third quarter related to the ongoing pandemic and economic recession.
• Hiring by businesses caused the unemployment rate to drop to 7.9%, after peaking at nearly 15% in April.  Even after the recent additions, however, more workers have lost their jobs than in the 2008-2009 financial crisis, and only about half of the 22.2 million people laid off or furloughed in the early days of the pandemic have returned to work.
• Reports during the third quarter confirmed the dramatic economic impact of the surge in COVID-19 cases in the United States and abroad and the resulting restrictions on activity.  Second quarter GDP declined 31.4% after dropping 5% in the first quarter. 
• Corporate earnings fell 32% in the second quarter.  Corporate earnings are likely to be 21% lower in the third quarter and 12% lower in the fourth compared to last year.  However, analysts currently expect a 26% uptick in 2021 as the economy regains its footing and comparisons are to 2020’s depressed levels.
• The U.S. Federal Reserve remained steadfast in its commitment to supporting the economy and revised its policy to allow inflation to rise for longer before triggering a Fed move to increase interest rates.  Meanwhile, disagreement over the size and details of another stimulus measure has prevented Congress and the White House from offering additional relief that we were hoping to see.
• Economists expect GDP to rise in the third quarter compared to the second at an annual rate of around 24%.  However, we believe unemployed workers will need substantial additional help from Congress and the White House, and we are disappointed by the lack of support so far.  Without further action, a decrease in consumer spending across a broad swath of the population will likely leave the United States mired in an economic downturn.
• The upcoming elections will be the primary focal point for the next several weeks, and the heated rhetoric and strong emotions portend more volatility in the markets until we get a clear resolution of the outcome.  Despite what many people believe, the stock market has performed well during presidential terms no matter which party occupies the White House.
• We have confidence in our nation and our markets, and we know we will emerge from the current situation and resume economic growth.  In the meantime, we are largely sticking with our long-term investment strategy, and we are investing some cash to take advantage of current opportunities.

The Edgemoor Team

In this latest installment of our quarterly newsletter, we share our observations on the second quarter of 2020 and our outlook for the remainder of the year.  Click here to go to the full report on our website.  The following are a few highlights: 

• The stock market’s second quarter performance marked its best quarter since 1998, after a sharp fall in the first quarter.  The S&P 500 index rose 20.5% on aggressive actions by the U. S. Federal Reserve and Congress and signs of an economic rebound, most notably the robust rehiring of workers in May and June. 
• Stocks’ recovery from their March lows was remarkable for its speed and magnitude.  Having plunged 34% from its high in February to its low point on March 23^rd, the S&P 500 index gained almost 39% through the end of June, with over half of that increase coming in the second quarter. 
• The sectors with the best performance during the quarter included consumer cyclical, energy, and technology, each up more than 30%. The S&P 500 index ended June down only 3.1% for the first six months, a performance we consider impressive given the severity of the challenges. 
• Reports during the quarter confirmed that U.S. gross domestic product (GDP) declined during the first quarter at a 5% annual rate, and expectations are for an even more severe decline in GDP in the second quarter despite the employment gains. 
• Corporate earnings declined 15% during the first quarter, hurt by the pandemic-related shutdowns in March.  Current estimates project an earnings decline of 45% for S&P 500 companies in the second quarter, when the shutdowns affected the entire period. 
• Powerful support from the U.S. Fed and foreign central banks, combined with government fiscal support in the United States and abroad, was critical to the global economy’s ability to dampen the economic blow from the pandemic. 
• We are pleased to see the stock market’s resilience in the face of the significant challenges presented by the pandemic.  However, we have concerns about the market’s prospects for the coming quarters and are being cautious with our portfolios.   
• The United States clearly is having difficulty controlling the spread of COVID-19, and we are concerned that our economic recovery will take longer, and securities will remain volatile, as a result.  Much uncertainty remains regarding the economic outlook, including the reopening of schools over the next few months that is a prerequisite for many workers to return to their jobs. 
• Also unknown is whether our political leaders will provide another round of relief to workers and households still hurt by loss of jobs and closure of much of our economy.  We are hopeful that further relief will be forthcoming and are confident the Fed will do what it can to help, but we are wary of the political squabbles ahead as Congress and the White House work out the details of any additional relief measures. 
• We continue to believe the best course of action for investors is to stick with our long-term investment strategy, which focuses on shares of high-quality companies with durable business models and sustainable competitive advantages that will survive this temporary threat. 
• As noted in earlier reports, we have sold certain holdings that we believed were most directly exposed to the impact of the pandemic and built up cash reserves in the process.  While we intend to generally hold current cash levels until we get more certainty regarding the pandemic and economy, we expect to take advantage of opportunities to purchase individual securities that become available at attractive prices, particularly if the market drops again over the coming months.  For the income portion of our portfolios, we are also being cautious and currently favor less volatile securities such as bonds and preferred stocks. 
• We know recent conditions have been stressful on many fronts, and we appreciate your ongoing patience and confidence in our investment approach and stewardship of your assets.  While we do not know how long this economic disruption will last, we are confident that the economy and markets will bounce back once conditions improve, as has happened after every other downturn.  We remain optimistic that the United States will get through these tough times and that our clients’ portfolios will perform well over the long term. 

The Edgemoor Team 

In this latest installment of our quarterly newsletter, we share our observations on the dramatic events of the first quarter of 2020 and our outlook for future quarters.  Click here to go to the full report on our website.  The following are a few highlights:

• The past several weeks have been difficult, and we know watching the coronavirus spread and the stock market fall is unnerving, even to long-term investors. We believe that an essential part of our work on our clients’ behalf involves remaining patient and disciplined in times such as these.
• The worldwide spread of the novel coronavirus and COVID-19, the disease it causes, has upended societies, with widespread restrictions on business, travel, and social interaction sharply reducing global economic activity and causing layoffs or furloughs of millions of workers.
• COVID-19 is not the only issue that has unnerved investors. In addition, an ill-timed dispute between Saudi Arabia and Russia over oil production, in which both increased output, combined with lower global demand to cause oil prices to plummet.
• The spread of COVID-19 and the oil price decline have rattled global markets. After rising through mid-February, the S&P 500 index fell sharply into bear market territory in March.  Over the past month, we have seen some of the stock market’s largest ever one-day swings, both up and down. After eleven years, the longest bull market in history has come to an end.
• As jarring as stocks’ drop has been, we think it is helpful to put the recent pullback into perspective. The S&P 500 index currently trades at the same level as at the beginning of 2019, so it has essentially given back the huge gains from last year. Also, the S&P 500 index is still up over 285% since the depths of the financial crisis.
• In response to the outbreak, central banks and governments around the world have announced aggressive initiatives to mitigate the economic impact of the spread of the coronavirus. 
  • The Fed has so far cut interest rates to near zero, committed to buying as much government debt as needed to shore up markets, and announced unprecedented plans to buy corporate bonds, including the riskiest investment-grade bonds.
  • Meanwhile, the U.S. Congress passed an over $2 trillion relief package that provides for direct payments to individuals, expanded unemployment insurance benefits for workers, loans and grants to businesses, and funds for states and healthcare providers.
• We believe the congressional relief package is vitally important and necessary to dampen the effects of the sharp drop in economic activity due to quarantines and lockdowns. We also expect there will be a need for additional support as the United States and the rest of the world continue to fight the coronavirus.
• The market is clearly anticipating more bad news, and it remains to be seen whether current valuations appropriately reflect future events.
• We are watching developments closely and monitoring the virus’s impact on the economy, the markets, and our clients’ portfolios. We have sold a few holdings that we believe to be most exposed to these issues, a move that raised additional cash for future investment and should reduce risk in our portfolios.
• We also expect to resume investing available cash after the market volatility calms down, since the shares of some high-quality companies that we do not own are now available at prices well below our estimates of their intrinsic value.
• We know recent market conditions have been stressful, and we appreciate your ongoing patience and confidence in our approach and stewardship of your assets.

The Edgemoor Team

The S&P 500 index is an unmanaged market-capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. The S&P 500 index is discussed for comparative purposes only. The comparisons have limitations because the indexes have volatility, investment, and other characteristics that differ from the investment strategies of Edgemoor. Further, it is not possible to invest directly in the indexes.