As of 09-30-2018

Highlights

  • Fears of a full-blown global trade were shrugged off by domestic equity investors
  • Strong U.S. economic data and earnings were major tailwinds for equities during the third quarter
  • The focus likely will shift temporarily from tariffs to midterm elections as we head into the final quarter of 2018

Looking Back

In the third quarter of 2018, domestic equity markets continued to shrug off fears of a global trade war and were able to climb higher as both the S&P 500 Index and the Dow Jones Industrial Average reached all-time highs in September, led by Health Care, Industrials and Information Technology stocks. During the quarter, the U.S. Federal Reserve (Fed) unsurprisingly raised the fed funds target rate by another 25 basis points to a range of 2-2.25% on the heels of continued strong economic data. Helping overall market sentiment were S&P 500 earnings-per-share, which posted a roughly 25% year-over-year again in the second-quarter reporting season; a 4.2% annualized increase in second-quarter gross domestic product; continued strong consumer confidence; and an easing of tariff and trade tensions with Mexico and Canada.

During the quarter, the S&P 500 returned 7.71%. In addition, value stocks underperformed growth stocks with the Russell 1000 Value returning 5.70% while the Russell 1000 Growth returned 9.17%.

Performance

Federated Equity Income Fund A Shares at NAV returned 3.71% for the third quarter of 2018, underperforming the 5.70% return of the fund’s benchmark (Russell 1000 Value).

Performance data quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than what is stated. Other share classes may have experienced different returns than the share class presented. To view performance current to the most recent month-end and for after-tax returns, click on the Performance tab.

Click the Performance tab for standard fund performance.

Click on the Portfolio Characteristics tab for fund’s top 10 holdings.

Performance Contributors

  • Stock selection within the Energy and Industrials sectors
  • A relative underweight in the Real Estate sector
  • Relative overweight positions in HCA Healthcare and Apple

Performance Detractors

  • Stock selection in the Information Technology and Materials sectors
  • A relative underweight in the Health Care sector
  • Underweight positions in Berkshire Hathaway (no exposure) and Pfizer

How We Are Positioned

As we begin the final quarter of 2018, we expect the midterm elections to dominate the narrative over the first month or so leading to the early November election. Coupled with the election will be the third-quarter earnings season, in which we expect another strong round of reports from our companies. We will be looking for commentary on if and how the tariffs with China are affecting management’s capital investment plans, the supply chain and pricing, and if prices for end consumers are rising, which could drive inflation. We also expect the revised Nafta agreement with Canada and Mexico to be ratified by Congress, a market positive as it moves the trade war largely to a one-front war with China. Regarding China, we do not foresee a swift resolution and anticipate additional tariffs taking effect in 2019. We expect the U.S economy to continue its strong path and unemployment to remain low, and for the Fed to again raise rates in December. 

The fund is positioned within a diversified portfolio of dividend-paying and growing stocks with favorable valuations, strong balance sheets and improving business fundamentals. The portfolio continues to aim for relative long-term total return, above average yield and dividend growth potential.

Given relative market valuations and considering risks, we believe a balanced portfolio of cyclical and defensive companies that have strong cash flow, balance sheet strength and improving fundamentals will continue to help navigate the current choppy investment landscape.