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

•  Stock and bond markets proved far more resilient in the first quarter of 2023 than most investors expected, though it was not without considerable choppiness along the way.
• The S&P 500 Index posted a surprisingly strong 7.5% total return in the first quarter of 2023, while the tech-heavy Nasdaq saw an even better recovery from last year’s losses, returning 17% for the quarter, its best quarter since the second quarter of 2020.
• The Bloomberg Aggregate Bond Index also returned a positive 3.0% in the first quarter, as long-term interest rates declined, sending bond prices higher.  The yield on the 10-year Treasury note, which influences everything from mortgage rates to car loans, fell to 3.5% by quarter-end from 3.8% at the end of 2022.
• The shock to the banking system by the sudden collapse of SVB in mid-March sent some financial stocks down 30% or more for the month, though the contagion hit mostly smaller, regional banks while larger, money-center banks fared much better. For the quarter, the S&P Regional Banking ETF was down 25%, while the broader Financial Sector ETF was off just 6.5%.
• The heightened risk to the financial system from the bank failures likely impacted the Fed’s decision to raise short-term interest rates by just 0.25% in March, despite an expected increase of 0.50% earlier in the month. The Fed also softened its language regarding future rate increases by omitting a prior forecast for “ongoing increases.” This has raised hope among investors that the Fed may be ready to pause its rate raising campaign, despite the persistence of inflation.
• Notwithstanding the persistence of high inflation and slowing economic growth, there has been some positive economic data so far in 2023. The Atlanta Fed projects first quarter GDP growth of 2.2%, which, while down from fourth quarter GDP growth of 2.6%, nonetheless indicates a growing economy.
• The labor market also remains robust, although slowing. The U.S. economy added 236,000 new jobs in March, roughly in line with expectations. The unemployment rate slipped to 3.5% in March from 3.6% in February, and the labor force participation rate continued to rise, which is considered a positive. The U.S. has added more than one million new jobs in the first three months of this year.
• But recession fears are rising. The Fed recently lowered its forecast for full-year 2023 GDP growth to just 0.4%. Given that estimates for Q1 GDP growth are in the range of 1.5%-2.5%, this suggests that the U.S. could see negative GDP growth in the coming quarters. Recession is generally defined as two consecutive quarters of negative GDP growth.
• Finally, corporate earnings are contracting. S&P 500 earnings declined 4.6% in the fourth quarter of 2022 and are forecasted to decline again in the first quarter of 2023.
• Still, some argue that a recession is not inevitable. Those in that camp point out that inflation appears to have peaked, supply-chain woes have eased, China has re-opened its economy, and oil prices remain low. We’ll see who is right.
• Given all the uncertainties, our outlook for the economy and markets is mixed.  We remain cautious on equities in the near term. Stock valuations, as measured by the S&P 500 Index, are neither overly expensive, nor are they cheap. We expect market volatility to remain elevated until there is more clarity on interest rates, inflation, corporate earnings, and world economic growth.
• While we are maintaining our long-term, value-oriented investment philosophy, we have taken a more cautious view of equity markets for the near term. Instead, beginning last fall, we have been deploying uninvested cash in short-term U.S. Treasuries at attractive, low-risk annualized yields of 4.5% – 5%.
• Once the Fed signals that it is pulling back from its aggressive rate tightening, and economic growth and corporate profits have stabilized, we will resume deploying cash in long-term equities.
• We continue to believe that our disciplined, active approach to individual security selection is more cost effective, tax efficient, and offers better long-term return potential over a full market cycle for our clients.

The Edgemoor Team

In this latest installment of our newsletter, we share our observations on 2022 and our outlook for 2023. Click here to go to the full report on our website.  Following are the highlights:

• Good Riddance to 2022!
• Most investors were happy to see 2022 come to an end.  There were few places for investors to hide, as nearly every segment of the financial markets posted losses for the year. U.S. stocks posted their worst year since 2008, while many parts of the bond market suffered their biggest losses in history.
• The traditional role of income investments as a buffer to more volatile equity markets did not hold up, deepening the pain of balanced portfolios.
• The S&P 500 posted a negative total return for the year of 18.1%, just shy of bear market territory (a decline of 20% or more), where it had spent much of the year. 
• Bonds had their worst year in history, with the Bloomberg Barclay’s Aggregate Bond Index posting a 13% decline for the year.  Prior year losses going back to 1976 had never exceeded negative 2% for the bond index.
• Global diversification didn’t help investors either, as both the European and emerging markets indices experienced double-digit losses.
• And in perhaps the most spectacular crash of the year, cryptocurrencies spent most of the year in severe decline, capped off by the collapse of crypto trading platform FTX in November.  The largest cryptocurrency, bitcoin, lost over $550 billion in market value in 2022 as its price sank 65%. 
• The market’s heightened volatility was directly related to larger-than-expected increases in inflation and interest rates throughout the year.
• U.S. inflation hit a decades-high rate of over 9% in June 2022, spurring the Federal Reserve to raise its benchmark Fed Funds rate at its fastest pace since the early 1980s.  The Fed’s seven interest rate hikes through the year resulted in the short-term rate rising sharply to a target range of 4.25% – 4.5% at year-end from near zero in January. 
• Looking ahead, the good news is that the worst of the rate hikes is likely behind us, as the Fed is expected to slow its pace of rate increases in 2023.  At its next meeting in February, many expect the Fed to raise rates by just 0.25% and end 2023 with an expected Fed Funds rate of around 5%.
• Recession or Slow-cession?  Rising interest rates are intended to slow the economy just enough to dampen inflation.  But a recent WSJ survey indicated that economists place roughly 65% odds on the U.S. economy slowing enough to fall into some level of recession in 2023.  The depth and length of a potential recession, however, remain hotly debated.   
• In fact, several economists believe that 2023 might not bring a full-blown recession at all, but rather a “slow-cession” – or a period of less than 1% GDP growth in each of the next four quarters.  They point to the strong labor market, healthy consumer and corporate balance sheets, and a well-capitalized financial system as reasons why the U.S. economy could avoid a significant economic contraction this year.
• Declining inflation is another potential bright spot for the U.S. economy in 2023.  The Consumer Price Index, or CPI, which is the broadest measure of inflation, hit a highpoint of 9.1% in June 2022 and has since declined steadily to its latest reading of 6.5% in December, which was the smallest 12-month increase since December 2021.
• Outlook for 2023:  Our outlook for the stock market and the economy in 2023 is somewhat mixed.  While we do expect inflation and interest rates to moderate in 2023, their negative impact on corporate earnings and the job market is likely to become more pronounced in the first part of the year. 
• While we are maintaining our long-term, value-oriented investment philosophy, we have taken a more cautious view of equity markets for the near-term.  Instead, we have been deploying cash in short-term U.S. Treasuries at attractive, risk-free yields in excess of 4.5%. 
• Stock valuations have started 2023 at more reasonable levels than at the beginning of 2022.  The forward 12-month price/earnings ratio for the S&P 500 currently stands at 17.3 times, below the 5-year average of 18.3 times and well below the 23x valuation at the beginning of 2022.  We believe this should translate into better compounded returns for investors over the next 2 – 5 years once the economy and markets stabilize.

The Edgemoor Team

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 30^th, 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

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