Printer Friendly





July, 2019

     In our January newsletter, we highlighted that a less "hawkish" Federal Reserve would at a minimum help stabilize markets that were extremely volatile at the end of 2018. In particular equity markets which were coming off their worst December in 90 years. Since that time, a less "hawkish" Fed has become a "dovish" Fed with the probability of rate cuts in 2019 a foregone conclusion. In fact, there is a near certainty of a 25-basis point rate reduction at the next FOMC meeting in July. Equity markets have responded in kind by hitting a new all-time high on the SPX 500, and bond markets have responded dramatically as well staging a 70-basis point rally on the 10yr note to a recent low of 1.95%. This is the lowest rate we have witnessed on 10 Year Treasury Notes in nearly 3 years.

The Fed has played a tremendous role in helping to lift asset prices. Other factors such as optimism over a trade deal with China and easy money policies around the globe have played an important part as well. Despite seemingly low rates in the United States, our bond yields look high relative to other developed nations. Germany at -33 basis points and Japan at -17 basis points on their 10-year notes are two such examples. Negative bond yields are a concept that is almost impossible to comprehend, and probably a warning sign of a looming global slowdown or recession at some point. Technical factors helped drive yields lower as well since many bond managers, investment banks and hedge funds had been looking for rates to rise in 2019. In other words, they were caught offsides and have been forced to buy bonds at higher prices and lower yields. With some signs of slowing growth and benign inflation on the horizon, this trend toward lower rates appears likely to continue.

In the near term, one benefit of lower bond yields is that they are helping drive equity markets and other risk assets higher. To put it simply, the SPX 500 yields the same as the 10-year Treasury note (2%). Most would agree that one would rather own Equities for the next 10 years rather than lock in an after-tax rate of 1% on U.S. Treasurys. Many common stocks, MLP's, Preferred shares, REITs, and Closed End Funds (CEF's) offer yields far in excess of Treasurys with possible price appreciation. As most of you know by now, we have always invested with an eye on income from high quality stocks and the aforementioned asset classes.

One might ask, can low rates lead to the next risk asset bubble? The answer is yes it may, but trying to time the next major downfall in asset prices is very difficult. Interest rates can go lower and stay low for a very long time. Hence our preference for staying invested in high quality securities while maintaining a moderate cash cushion for adverse times. We don't believe this is a time to take undue credit risk in fixed income or in equities by owning companies with highly leveraged balance sheets or weak fundamentals.

As most of our investors also know, we run balanced portfolios maintaining a blend of equities (and equity-like products), fixed income and cash. For many years the bulk of our fixed income assets were in Mortgage Backed Securities (MBS). As we have mentioned in prior letters, these securities are nearly impossible to replace but they continue to generate yields well in excess of current Treasury rates. As a surrogate to MBS we have purchased corporate bonds and corporate bond ETF's, MLP's, Preferred Shares, REITs, and CEF's. With interest rates nearing all-time lows, high quality income producing assets will continue to perform well as investors reach for yield outside of the Treasury market.

We believe the remainder of 2019 will look similar to the first half of the year with bouts of volatility and asset prices generally trending sideways to upward. Low interest rates, a potential trade deal with China and a relatively stable economy in the U.S. can all contribute to higher equity prices in 2019. As we have mentioned in the past, volatility can bring opportunity and we look for those moments to deploy excess cash into high quality income producing and growth assets. We 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.