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Investment Letter

1st Quarter 2018


March 2018 marked the nine-year anniversary of the current bull market, but instead of a celebration, investors focused on the health and well-being of the market during the first quarter. The raucous ride in the financial markets started with a strong first month of performance. By early February, market volatility picked up, and the positive returns quickly diminished. The Dow Jones Industrial Average (DJIA) and S&P 500 Index fell into official “correction” territory (10% decline from a 52-week high) on February 8, 2018 only to make a recovery and again test the correction boundary by quarter end. Despite the slide in domestic stocks for most of the quarter, the indices only recorded minor declines. The DJIA finished the quarter with a negative total return of -1.96% at 24,103.11 points, and the S&P 500 Index ended at 2,640.87 points with a negative total return of -0.76%. The 2009-2018 bull market still has another six months before it can claim the title for longest in history, but the increase in market volatility has given investors a mild case of anxiety. 

Just as a falling tide lowers all boats, the decline in domestic equities had a similar effect on manyasset classes. The table below recaps the performance of major indices:

Asset Class


1stQtr. 2018 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

During periods of market corrections, it is logical to seek out a cause for the market’s adjustments. To some degree, the pullback in equites this quarter was linked to a combination of factors that included: tight credit conditions, tighter monetary policy, tariff and trade headlines, the FANG (Facebook, Amazon, Netflix, and Google) stock focus, and increased market volatility.

Nervous investors are often emotional and irrational. From our perspective, the first quarter decline was based more on emotional responses from investors and not a health assessment of the economic expansion. See the economic indicators below for additional information.  


2.9% Growth (annual rate) – 4th Quarter 2017



1.8% CPI (less food and energy) and 2.2% CPI (all items) year-on-year February 2018


Interest rates

March 2018 increase 0.25%. Federal Funds Rate 1.50 - 1.75%



Unemployment at 4.1% (6thconsecutive month); 103,000 non-farm payroll jobs added in March; Labor force participation rate 62.9%; Health care, manufacturing, and mining were positive contributors to job growth.



ISM Manufacturing Index remained in expansion territory. The March estimate fell slightly from the previous month’s near 14-year high. New orders, production, employment, supplier deliveries, and inventories were down slightly.


Business Spending

Private non-residential investment continued to trend upward; New durable goods orders increased 3.1% in February 2018


Corporate Profits

3rd Quarter 2017 - U.S. corporate profits decreased 0.1% S&P 500 Earnings per share = $33.86



New home sales declined 0.6%; Housing starts down 7.0%; Existing home sales were up 3.0%; Building permits declined 5.7%; MBA fixed 30-yr mortgage rates = 4.69% 


Consumer Spending

Disposable income remained strong; Consumer Confidence eased in March after an 18-year high in February; Retail Sales fell for the third consecutive month; Total vehicle sales were up slightly; Spending on personal, durable and nondurable items continued to be elevated; Savings rate = 3.4%.



Oil price (West Texas Intermediate) = $64.87/bbl – 3/29/2018; Gas price (U.S. average regular unleaded) = $2.70/gal – 4/2/2018


The March 2018 Beige Book report released by the Federal Open Market Committee (FOMC) stated overall economic activity during the quarter expanded at a modest to moderate pace across the 12 Federal Reserve Districts. The report indicated conditions were mixed for consumer spending; tourism activity was solid; growth in home sales and construction were modest; nonresidential real estate market improved; increases in production were broad based across manufacturing sectors; agricultural sector activity was mixed but flat overall; employment grew at a moderate pace; wage growth had picked up; and prices and inflation were on the rise. [1]

The FOMC convened twice during the quarter to discuss the economy and monetary policy.  The March meeting minutes confirmed current economic conditions remained supportive and gross domestic product (GDP) was rising at a moderate pace in the first quarter. The Committee also noted the increase in market volatility and pointed to the prospects for higher inflation and higher rates as a major contributor to the decline in equities. At the January meeting, the FOMC decided to maintain the target range for the federal funds rate, but the March meeting minutes revealed the decision to raise rates to a target range of 1 ½ to 1 ¾ percent due to realized and expected labor market conditions and inflation. The Committee reiterated their accommodative stance on monetary policy, and they anticipate economic conditions to evolve in a manner that will warrant future increases in the federal funds rate. The Fed expects to follow a gradual rate hike strategy, but the actual path of future increases will depend on the incoming economic data.[2]

Our outlook for the domestic economy remains positive, and we anticipate the current bull market will survive to celebrate a 10thanniversary in 2019.   The softer economic numbers during the quarter were probably the result of the lingering winter weather. We are confident that the economy will see a boost in economic data as spring time conditions become more prevalent. We believe consumers will maintain their monetary support for the economic expansion. We are expecting stronger domestic growth later this year as the corporate tax change translates into stronger earnings. Inflation should remain modest, but lower employment will put extra pressure on wages and prices.  The March rate hike by the Fed was the fourth in the last twelve months. Based on the Fed’s economic outlook, we anticipate two or three additional increases this year to keep the economy from over-heating. Dwindling labor market improvement can be expected as the economy gets closer and closer to full employment. The aging Baby Boomer generation will add pressure to the declining labor force participation rate. Elevated oil prices have returned, but we do not foresee a dramatic spike in values despite strong demand, lower supply, and geopolitical tensions.

International economies should continue to outpace the U.S economy. We expect broad based Eurozone growth throughout the remainder of 2018. The stronger euro should help keep inflation low, and the European Central Bank will maintain their accommodative monetary policy. The deadline for Britain to leave the European Union is approximately one year away (March 2019). Trade deals are far from being finalized, but we are hopeful the Brexit negotiations will proceed smoothly. In the interim, the region might experience some economic instabilities. Additional economic improvement is likely in Japan due to supportive fiscal and monetary policies, lower unemployment, higher yen prices, and expanding manufacturing conditions. We expect more steady growth in China. Officials are working to achieve sustainable growth levels, but an increase in trade tensions and financial risk issues (corporate, government, and household debt levels and “shadow banking”) could alter long-term growth estimates. Emerging market economies - India, Mexico, Brazil, and Russia all showed recent improvement. While we anticipate further advancement in many areas, we also recognize that rising inflation, higher U.S. dollar prices, and the potential for a trade war could negatively affect emerging market economies. 

The impact of domestic and international risks on the global economy is powerful, and a single event can often be the catalyst that decides economic prosperity or adversity. We have identified and are diligently monitoring the following threats: fiscal and monetary policies, restrictive trade (tariffs), higher market volatility, energy price shocks, aging workforce, Brexit negotiations, China’s growth and financial risks, extreme weather events, natural disasters, cyberattacks, terrorism, and escalating geopolitical tensions (Syria and North Korea). Overall, we believe the global economy is in good shape and financial conditions should continue to be favorable for investors. As always, we remain watchful!

When market volatility intensifies, it is unsettling to watch your investments go up and down.  While, no strategy can guarantee positive returns, investors can mitigate the negative effects of market volatility by following these recommendations:


·         Be patient

·         Remain invested

·         Maintain a diversified portfolio

·         Monitor your investments

·         Understand your risk tolerance

·         Set realistic expectations

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



·         Panic

·         Make emotional investment decisions

·         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: Federal Reserve System, Monetary Policy Beige Book Report, March 7, 2018.https://www.federalreserve.gov/monetarypolicy/files/BeigeBook_20180307.pdf

[2]Source: Federal Reserve System, FOMC Press Release – Meeting Minutes, March 20-21, 2018. https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20180321.pdf




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