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Investment Letter

1st Quarter 2017

Investors had plenty to celebrate during the first three months of 2017 as the bull market turned a year older (8 years) and the Dow Jones Industrial Average (DJIA) surpassed an important milestone (20,000).  These achievements seemed improbable after the terrible start for the financial markets in 2016.  The decline in equities pushed the index down to a low of 15,660.18 in February 2016, and the naysayers were quick to proclaim the bull market was over.  However, the financial market recovery in the spring and summer of 2016 reassured investors that the bull market was still on solid ground.  As the index continued to climb higher, the possibility of DOW 20K by year end became more realistic.  Ultimately, investors were denied a 2016 celebration as the index fell short of the milestone, but they did not have to wait very long.  Positive momentum in equites carried over into 2017, and the index passed the magical number on January 25, 2017 to close at 20,068.51 points.  From the February low of 2016 to the DOW 20K close, the DJIA enjoyed a price appreciation of over 28%.  During the first quarter, the index accelerated even further to hit a new all-time high of 21,115.55 on March 1st.  To get a perspective on the recent success in the financial markets, see the table below for the DJIA milestones and the dates which they occurred. 


Dow Jones Industrial Average Milestones

1,000 Nov 1972

5,000 Nov 1995

10,000 Mar 1999

15,000 May 2013

16,000 Nov 2013

17,000 July 2014

18,000 Dec 2014

19,000 Nov 2016

20,000 Jan 2017

21,000 Mar 2017



The broader S&P 500 Index also benefited from favorable financial conditions during the quarter to set an all-time high of 2,395.96 points on the same day as the DJIA (3/1/2017).  Going back to the start of the bull market on March 9, 2009 (97 months ago), the S&P 500 Index has increased approximately 249% through the first quarter of 2017.  According to Wilshire Associates and the S&P Dow Jones Indices, the current bull market ranks second in longest performing, fourth in overall performance, and has generated more than $21 trillion in new stock market wealth through March 1, 2017.[1] 

 Domestic and international stocks performed well during the first three months of 2017, fixed income returns were minimal, and cash investments continued to lag inflation. The table below recaps the performance of major indices: 

Asset Class


1stQtr. 2017 Total Return


BofA/ML Three-Month U.S. Treasury


U.S. Bonds

Barclays Intermediate-Term Treasury


U.S. Large Co. Stocks

S&P 500 Total Return


U.S. Small Co. Stocks

Russell 2000 Total Return


International Stocks

MSCI EAFE (net div.)


Real Estate

DJ Select Real Estate Securities Total Return


Source: Morningstar 

U.S. economic conditions continued to be supportive of the current expansion, but the pace of growth remained slow.  See the economic indicators below for additional information. 


2.1% Growth (annual rate) - 4th Quarter 2016



2.4% - CPI year-on-year ending March 2017


Interest rates

March increase of 0.25% ; Federal Funds Rate 0.75 - 1.00%



Unemployment at 4.5%; 98,000 non-farm payroll jobs added in March



New orders, production, and employment grew; Supplier deliveries slowing; Inventories contracting


Business Spending

Private non-residential investment trended upward; New durable goods orders increased 1.7% in February


Corporate Profits

4th Quarter 2016 - U.S. corporate profits rose 2.3% and S&P 500 Earnings per share = $27.90



New home sales and housing starts increased; Existing home sales were steady; 30-yr mortgage rates = 4.23%


Consumer Spending

Disposable income remained strong; Consumer Confidence improved; Retail Sales up; Total vehicle sales lower; Higher energy prices moderated discretionary spending



Oil price (West Texas Intermediate) = $50.54/bbl - 3/31/17; Gas Price (U.S. average regular unleaded) = $2.315/gal - 3/27/17



The latest Beige Book report released by the Federal Open Market Committee (FOMC) stated economic activity during the quarter expanded at a modest to a moderate pace.  Supportive conditions were confirmed as the FOMC’s data indicated that manufacturing continued to expand; consumer spending varied; tourism and travel activity picked up; residential and non-residential construction was stronger; non-financial services expanded; conditions for energy related businesses improved; labor markets remained tight as employment expanded; and businesses expected mild to moderate price growth to persist.[2]

The FOMC decision to increase the federal funds rate in March was no surprise as labor markets moved closer to full employment and inflation conditions approached the Fed’s long-term objective of 2%.  The Fed indicated their stance on monetary policy will remain accommodative to support some further strengthening in labor market conditions and a sustained return to longer-run inflation objectives.  Going forward, the FOMC expects economic conditions to evolve in a manner that will warrant gradual increases to the federal funds rate, but the actual path of the federal funds rate will be data dependent.[3]

International economic data revealed that conditions are generally improving around the world.  A key indicator of manufacturing growth, the Global Purchasing Managers’ Index (PMI), reported improved conditions for many of the major Eurozone economies during the quarter.  Additional factors, such as, the European Central Bank’s accommodative monetary policy, lower unemployment, higher domestic demand, and reduced BREXIT impact, have also helped to brighten the Eurozone economic picture.  Japan’s economy showed signs of life, but growth is still low and limited by structural reform, demographic constraints, and fiscal stimulus.  China reported an annual growth rate of 6.8% (Q4 2016).  Industrial output, retail sales, and fixed asset investment were cited as major contributors to their growth.  Emerging market PMI data indicated a surge in growth for Brazil, Russia, India, Mexico, and Indonesia during the quarter.  This is a good signal that macroeconomic and fundamental improvements are spreading in an area that has endured a bumpy road recently.

We still have an optimistic outlook for the domestic economy.  Low but positive growth is expected for the foreseeable future.  We anticipate inflation to remain close to the Fed’s two percent target rate, and the labor force to move closer to full employment.  We expect additional improvement in manufacturing, the housing market, corporate profits, and consumer spending.  Oil prices might experience some slight volatility due to global inventory and output levels, but we believe prices should stay in the $50/bbl range.  Expectations are for the Fed to continue their policy normalization process by raising rates two more times this year.  Barring a setback in the economy or a change in policy, a summer and fall rate increase are most likely.  

We are upbeat about the international economy, and we believe that several areas around the world have the potential to outperform the U.S. in 2017.  We expect economic growth in Europe to accelerate.  BREXIT fears have diminished somewhat, but negotiations are in the early stages and the regional impact will be contingent on the final agreement.  Japan’s economic improvement is a welcome sight, but we do not anticipate a significant acceleration in their economic prosperity any time soon.  The buzz word for China’s economic policy is sustainability.  Look for officials to support the status quo (6.5% growth) using any means available despite the long-term consequences.  Fundamentals are improving for emerging market economies, but widespread political and economic reforms could be negative influences on activity.  While we believe there are many opportunities abroad, international investors need to be selective and recognize regional uncertainties. 

Overall, we expect 2017 to be a prosperous year, but there are some domestic and international concerns that top our watch list.  The failure to repeal and replace the Affordable Care Act was a setback for the Trump administration.  Their inability to deliver on a huge campaign promise gives us pause concerning future legislation.  Tax reform and infrastructure spending proposals are next on the agenda, and the approval of U.S. lawmakers will once again be a challenge.  Immigration, international trade, a strong dollar, oil prices, China’s growth, BREXIT negotiations, Eurozone elections, and escalating geopolitical tensions (Syria and North Korea) are additional challenges that could negatively impact economic prosperity.

Staying invested in the market is a critical component of a successful long-term investment strategy.  An investor who lets their emotions dictate investment policies might easily abandon the stock market during periods of volatility thus missing times of exceptional performance.  The chart below illustrates the risk of market timing. 


If an investor stayed fully invested in the S&P 500 Index for all 5,218 trading days (1997-2016), they would have received a compound annual return of +7.7%.  However, that same investment would have returned a + 4.0% had it missed only the 10 best days of stock returns.  Missing the best 20 days would have returned +1.6%, missing the best 30 days a return of +0.5%, and missing the best 40 days a loss of -2.4%.  Finally, missing the 50 best days out of 5,218 would have produced a compound annual return of -4.2%.[4]  While the appeal of market timing is fairly obvious (improving portfolio returns by avoiding periods of poor performance), timing the market consistently is extremely difficult. 

Market volatility can be unsettling, but investors can mitigate the effects of market volatility by following these recommendations:


·         Be patient

·         Remain invested

·         Maintain a diversified portfolio

·         Understand your risk tolerance

·         Consult your financial advisor periodically to make sure you are on track



·         Panic

·         Attempt to time the market

·         Lose focus of your long-term financial goals

As I have often stated, our investment philosophy remains based on the fundamentals.  We believe it is time---not timing---that matters most.   History shows the successful long-term investor is patient, weathers market swings, and adheres to a disciplined investment process that includes a diversified asset allocation strategy based upon a tolerance for risk and need for return.

In closing, I want to thank you for the opportunity of working with you and for your continued confidence and trust.  Please contact me if you have any questions.  Enclosed you will also find the William Howard & Co. Financial Advisors, Inc. Privacy Policy.

With kindest personal regards, I am

Very truly yours,



[1]Source: Adam Shell, “Numbers don't lie: Wall Street bull is real deal,” USA Today, March 5, 2017. https://www.usatoday.com/story/money/markets/2017/03/05/bull-by-the-numbers-intro/98653870/

[2]Source: Federal Reserve System, Monetary Policy Beige Book Report, April 19, 2017.https://www.federalreserve.gov/monetarypolicy/files/Beigebook_20170419.pdf

[3]Source: Federal Reserve System, FOMC Statement Press Release, March 15, 2017. https://www.federalreserve.gov/monetarypolicy/files/monetary20170315a1.pdf

[4]Source: Principia® Presentation and Education, 2017 Principals of Investing Module, “The Cost of Market Timing, Risk of missing the best days in the market 1997–2016.”

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