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Jan 5th, 2018

Dear Client,                                              


Looking back on 2017, it will be remembered as one of the least volatile periods for financial markets in recent memory. Despite our prediction that volatility would increase in the latter half of 2017, The VIX (S&P 500 volatility index) continued to hover near all-time lows. The lack of volatility coupled with optimism over corporate tax cuts helped propel equity markets to new highs. This was in spite of The Federal Reserve raising interest rates 3 times, geopolitical uncertainty and central bank liquidity that is likely to diminish in 2018.   



It has been 19 months since the last correction of 5% or more in the equity markets, but the absence of volatility has not been confined to equities alone. Bond markets remained quite stable throughout 2017 as well. Although short term interest rates rose by 70 basis points over the course of 2017, they did so in a uniform fashion while long interest rates ended the year almost exactly where they began. This 70 basis point "flattening" of the yield curve is concerning as it may portend a slowing of the credit and business cycles in the future. This remains to be seen as near term optimism over tax reform and its potential impacts outweigh the negative implications of a flattening yield curve and an overzealous Federal Reserve.


Being opportunistic investors, the one directional nature of the markets and lack of volatility made 2017 a challenging year. Our cash reserves have been on the high end of the range and the absence of any reasonable pull back has made it difficult to deploy excess cash. We are not predicting a major correction in the stock markets, but we do believe a normal sell-off would be healthy and is long overdue.


As in years past, we will remain patient and maintain our buy-on-dips strategy. In the coming year we favor the energy/MLP sector in particular. Energy stocks have underperformed over the past few years but look poised to rebound as earnings should get a boost from the recent tax reform package. In addition, a rebalancing in the global crude supply/demand equation will benefit the sector further. Technology was a strong performer in 2017 and we plan on maintaining our core positions in that space. Moreover, if interest rates rise and put pressure on rate sensitive assets, we will look to increase our allocation to income-oriented sectors.

Of course, the buy-on-dips strategy applies to bonds as well as stocks. In the past, we have been able to rely on mortgage backed securities (MBS) as a significant percentage of our asset mix. We mentioned in our July update that we had scaled back purchases mainly due to lower supply. Although we don’t anticipate a dramatic rise in long interest rates, a modest increase in rates could create opportunities in MBS or other areas within fixed income. Our existing MBS positions performed quite well again in 2017, returning +5% or more in most cases. The Barclays Aggregate bond index returned +3.5% in comparison.

Although 2017 was a challenging one for active managers, we believe volatility will increase in 2018 bringing with it better entry points for risk assets. We look forward to the coming year and thank all of you for your continued support.


Happy New Year



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.