Printer Friendly





July, 2018

Dear Client,                                              


The financial markets began 2018 similarly to how they left off in 2017, with bond yields trending upward, equities continuing their march higher and volatility remaining historically low. By the end of January, the relative calm that the markets had become accustomed to ended abruptly.



The widely followed measure of volatility, the VIX which had been hovering near a low reading of 10 spiked to a high of 50 on February 5th. As is typically the case with increased volatility, the equity markets sold off. A 7% year to date gain for the S&P 500 (SPX) quickly turned into a 3% loss as stocks absorbed their first correction of more than 5% in almost 2 years. By the middle of February, the equity markets had already witnessed more 1% moves up or down than all of 2017. Since February, this trend has not abated and considerable price swings seem like a daily occurrence. Stocks did manage to recoup most of their losses and by midyear the SPX 500 was +2.6% while the Dow Jones Industrial Average (DJIA) lagged at -0.7% year to date.


There are numerous reasons for the increase in volatility. Fear of rising interest rates due to a less accommodative Federal Reserve, geopolitical uncertainty, slowing growth in Europe and the most recent trade disputes are just a few. We don’t anticipate many of these headwinds to reverse quickly; therefore, we believe that increased volatility is here to stay for 2018 and possibly beyond.


Despite the recovery in equities, much like 2017, stock indices have been led higher mainly by a handful of large cap technology stocks. Many sectors within the equity markets such as industrials, healthcare, consumer staples and telecom have underperformed the broader indices. There are many high-quality names within these sectors that are trading near multi year lows and have very attractive valuations. Thus, we have added to the aforementioned sectors along with deploying cash in other "interest rate sensitive" asset classes such as REITs, preferred stock and utilities. We believe that the fear of much higher interest rates, particularly in the long end of the yield curve is overblown.

As mentioned earlier, one of the culprits behind the initial correction in stocks was a fear of higher interest rates. The U.S. Treasury 10yr Note yield increased by 40 basis points in a little over 1 month to start the year. Thus far in 2018, the 10yr Treasury yield has peaked at a high of 3.11% and has since dropped back to 2.85%. It would be a bold prediction to say that long term interest rates have peaked for 2018 but we do think it’s possible. If rates do continue to rise, we do not anticipate closing out 2018 with 10yr interest rates much above the peak of 3.11%. Therefore, we believe that high quality common stocks, preferred stocks, master limited partnerships (MLPs) and other income producing asset classes boasting yields in the 4% - 7% range are very attractive at current valuations.

With interest rates higher on the year, most fixed income securities have posted negative returns year to date. The Barclays Aggregate Bond Index (AGG) has returned -1.6% for the first 6 months of 2018. On the other hand, our Mortgage Backed Securities (MBS) positions are up 2% - 3% on average for the first half of 2018. Unfortunately, MBS have become impossible to replace as the asset class shrinks every year. However, with short term interest rates at attractive levels for the first time in years, municipal bonds and short term corporate bonds represent a viable alternative. We have been adding to these sectors along with closed end municipal bond funds that are trading at historically high discounts to net asset value.






In summary, we anticipate the second half of 2018 to be much like the first half. Equities and other asset classes face multiple headwinds that we do not think will be alleviated in the short run. Thus, we expect to see continued volatility across most asset classes. Overall, we believe our portfolios are positioned conservatively, while generating significant income in order to meet the challenges ahead. As we mentioned last year, increased volatility can be good news for investors as it brings buying opportunities in asset classes that were previously out of reach. Thank you for your continued support.



Edge Wealth Management







Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s, or be suitable for your portfolio.  Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Edge Wealth Management, LLC.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.