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EDGE WEALTH MANAGEMENT LLC

 


 

January, 2019

   In our July newsletter, we ended by saying that financial markets faced multiple headwinds that would not be alleviated in the short run. For the next few months in 2018, that statement appeared to be incorrect as equity markets rallied to a new all-time high on September 20th. It appeared once again that U.S. equity markets would defy the negative impacts of rising interest rates, trade wars and slower global growth. By early October, however, these restraints became too much for the markets to bear and the largest correction in stocks since 2008 began. From the high in September until the low in December, The S&P 500 (SPX) sold off 20%, marking the worst year for U.S. equities since 2008 and the worst December since 1931. Stocks did regain their footing over the last few trading sessions in 2018, gaining back some ground and finishing the year -4.6% including dividends on the SPX. The SPX 500 did not tell the full story of the carnage in equities for 2018 as most Small and Mid-Cap sectors fared far worse. For example, The Russell 2000 index finished -12% for 2018. Even worse was the performance in international and emerging equity markets. Most of the indices around the globe were down 15-30% at the close of trading for 2018.


To say that 2018 was a tumultuous year is a bit of an understatement. 1-2% (or more) price swings in the major market averages were an almost daily occurrence. The VIX (SPX volatility index) spiked to multiyear highs on numerous occasions and remained elevated for the last 4 months of the year. This was in stark contrast to 2017 when volatility remained low and stocks seemed to grind higher almost daily.


Although not as volatile on a daily basis as equities, the U.S. Treasury Bond market also had dramatic price swings during 2018. The end result, however, was only a 24 basis point rise in the 10yr note yield to 2.68% while the 2yr Treasury Note rose 60 basis points to a yield of 2.49%. As we mentioned in our July update, we thought rates would peak close to 3% on the 10yr Note which, as of now appears to be the case. As global and U.S. growth both show signs of slowing, The Federal Reserve will be forced to slow down their rapid pace of raising interest rates. The bond markets have already priced in this less “hawkish” stance by the fed. Currently, the Federal Funds Futures market is pricing in zero probability of a rate rise in 2019 and a 15% chance of a rate cut. This is a stark reduction from just two months ago when multiple rate rises were expected for the coming year. Although not necessarily a catalyst for stocks to rally, a less hawkish fed should at a minimum help to buoy stock prices.


In terms of equity positions, we have been cautious over the past year with our cash reserves remaining elevated. We still view equities as a very important asset class for both growth and income generation going forward. Therefore, we are using the recent pull back in prices to add selectively to our stock portfolios. As has been the case, more importantly now than ever, we are focusing on credit quality, high free cash flow, low debt levels and income generation in selecting equity positions.


It was a difficult year for bonds overall in 2018, although not as problematic as equities. The Barclays U.S. Bond Index returned .30% on the year while high yield and high-grade corporate bond ETF’s were -2.5% on average. Mortgage backed securities (MBS) on the other hand continued to outperform handily returning +4.5-5.5% on average. Unfortunately, MBS have become impossible to replace but we anticipate they will have another year of outperformance in 2019. As a substitute for MBS, we have added a variety of fixed income products or surrogates such as high-grade corporate bonds, municipalbonds, closed end funds and preferred stocks. Real Estate Investment Trusts (REITS), REIT ETF’s and REIT preferred shares are also a focus for income generation in our portfolios.


Looking ahead to 2019, we envision continued volatility in both the equity and fixed income markets. Daily price swings in the 1-2% range for stocks have become commonplace and we anticipate similar price fluctuations to continue in the near term. As we mentioned in our July update, increased volatility brings opportunity to add assets which were difficult in previous years with low volatility and a steady upward trajectory such as 2017. The correction which began in September has been fierce, creating opportunities to once again add high quality assets. As always, our approach for 2019 will be a pragmatic one. We are currently deploying excess cash into high quality securities with long term growth potential and steady income generation. As always, we thank you for your continued support as we look forward to 2019 and the opportunities it will bring.

Regards,
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.