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

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

• Stocks continued rising through the first quarter of 2021, maintaining momentum despite the ongoing pandemic, political and social unrest, and rising interest rates.
• Following an 18.3% surge in 2020, the S&P 500 index gained another 6.2%, including dividends, in the first three months of 2021.
• Investors found encouragement in the accelerating pace of vaccinations and expectations of a strong economic recovery this year, partly fueled by the promise of trillions of dollars in relief from the U.S. government and ongoing support from the Federal Reserve.
• Market leadership shifted from technology firms that mostly thrived during the pandemic to sectors that will likely benefit most from the economic rebound, including energy, financials, and industrials.  Small stocks, which are generally more affected by economic swings, also rose sharply.
• Largely due to concerns about inflation that might result from the influx of relief dollars and a rebounding economy, interest rates rose sharply, with the yield on the 10-Year Treasury almost doubling from 0.9% at the beginning of January to over 1.7% at the end of March.
• The Fed did its part to try to alleviate fears of inflation by maintaining its commitment to bond purchases and the low federal funds rate.
• Amidst an improving economy and increased business activity, corporate earnings rose.  Companies will report first quarter results soon, and analysts’ estimates of first quarter corporate earnings have increased to a growth rate of about 24%.
• We are optimistic that the U.S. economy is poised for a sharp rebound later this year as more people get vaccinated and return to travel, entertainment, dining out, and other activities curtailed by the pandemic for the past year.
• As for additional support from the government, we are hopeful that Congress will approve a significant amount of infrastructure spending, though the final result will probably be smaller and narrower than the Biden administration’s $2 trillion initial proposal.
• Analysts predict GDP growth of 7% or more for this year, which would be the highest rate since the 1980s.
• Finally, we believe the earnings outlook for companies is positive and stock valuations are reasonable given still-low interest rates and expectations of an economic rebound.

The Edgemoor Team

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.