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Investment Letter

2nd Quarter 2018

The sizzling temperatures of summer have arrived.  Time to soak up the sun, enjoy summer vacations, and recharge for the 2018 home stretch.

The economic temperature gauge climbed higher during the quarter as fundamentals intensified.  Growth improved; business profitability increased; unemployment remained low; manufacturing was up; the housing market advanced; tax cuts boosted consumer confidence and business spending.  The current economic expansion that started in June of 2009 is on track to become the longest ever with continued economic growth into 2019.

Unfortunately, surging economic conditions did not translate into fiery performance for the financial markets.  In fact, 2018 has been a bumpy ride.  After a promising start to the year, domestic large cap stocks struggled to recover from the spring correction.  The Dow Jones Industrial Average (DJIA) ended the mid-point of the year at 24,271.41 points with a total year-to-date (YTD) return of negative 0.73%.  The S&P 500 Index fared somewhat better with a positive 2.65% total return through June 30th.  International stocks and real estate stocks were hit hardest this spring. Real estate rallied back with a strong 2ndquarter performance, but international stocks were stuck in negative territory.  Domestic small cap stocks benefited from a superb performance in the month of May to finish with a YTD total return of positive 7.66%.

The table below recaps the performance of major indices:
Asset Class
2nd Qtr. 2018 Total Return
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
U.S. Small Co. Stocks
Russell 2000
International Stocks
MSCI EAFE (net div.)
Real Estate
DJ Select Real Estate Securities Total Return

                                 Source: Morningstar

 See the economic indicators below for additional information.  


2.0% Growth (annual rate) – 1st Quarter 2018



2.2% CPI (less food and energy) and 2.8% CPI (all items) year-on-year May 2018


Interest rates

June 2018 increase 0.25%. Federal Funds Rate 1.75 – 2.00%



Unemployment at 4.0%; 213,000 non-farm payroll jobs added in June; Labor force participation rate 62.9%; Professional & business services, manufacturing, health care, construction, and mining were positive contributors to job growth.



ISM Manufacturing Index increase of 1.5% in June. Demand was robust despite labor, skill, and material shortages.  New orders, production, and employment continued to lead the expansion. Inventories struggled due to slower supplier deliveries. 22ndconsecutive month of strong manufacturing growth.


Business Spending

Private non-residential investment continued to trend upward; New durable goods orders decreased slightly in April and May.


Corporate Profits

1st Quarter 2018 - U.S. corporate profits increased 1.8%. (6.8% over the last four quarters). S&P 500 Earnings per share = $36.54



New home sales increased 6.7%; Housing starts up 5.0%; Existing home sales declined due to supply shortages; Median sales price of existing homes surged; Building permits fell 4.6%; MBA fixed 30-yr mortgage rates = 4.79% 


Consumer Spending

Disposable income remained strong; Consumer confidence eased in June after a May improvement; Retail and food services sales grew by 0.5% over the previous month and 6.6% over June 2017; Total vehicle sales rose after a two-month decline; Personal durable spending was down, but personal nondurable spending remained elevated; Savings rate = 3.2%.



Oil price (West Texas Intermediate) = $74.13/bbl – 6/29/2018; Gas price (U.S. average regular unleaded) = $2.84/gal – 7/2/2018


Once again, the Federal Open Market Committee (FOMC) gathered for their quarterly meetings to discuss economic conditions.  The minutes from the June 12-13 meeting indicated a broader pace to the economic expansion.  Specifically, they noted a rise in real gross domestic product, stronger labor market conditions, a brisk increase to consumer spending, strong business fixed investment growth, and inflation near the Committee’s objectives.[1] After assessing current conditions, the FOMC decided to raise the target range for the federal funds rate by 25 basis points to 1.75-2.00%, and keep monetary policy accommodative, thereby supporting strong labor market conditions and a sustained return to longer-run inflation objectives. 

So far, 2018 has been a disappointment for many international economies. After the broad-based improvement in 2017, the Eurozone, U.K, and Japan experienced slower growth during the first half of the year. China’s growth remained solid, but it lost some steam from trade concerns and domestic headwinds. Emerging markets were hit the hardest due to election uncertainties, currency turbulence, and trade tensions.
Our outlook for the domestic economy is still optimistic. Current conditions lead us to believe that the economic expansion should continue well into next year. We expect a short-term boost in growth thanks to the 2017 tax reform and improved earnings, but then a return to a slow and steady pace into 2019. Inflation should remain modest around the Fed’s two percent target rate, and the labor market should continue to show incremental improvement. Consumers, manufacturing and a stronger housing market will be additional contributors to growth. The recent spike in oil prices does not concern us greatly. We feel it is only temporary as supply levels are forecasted to be on the rise. Due to overall stronger economic fundamentals, the rising rate environment will continue as the Federal Reserve tries to keep the economy from overheating. We are anticipating two more rate hikes this year (September and December) and possibly two to three rate hikes in 2019. 
Despite a softer 2018, our international outlook is encouraging. Lenient monetary conditions and supportive polices will continue to promote stronger growth.  While we anticipate divergences in financial outcomes, improvements in fundamentals and attractive valuations should help enhance financial performances in developed and emerging markets. 
We are mindful of the potential risks to the domestic and international economies. Specifically, the threat of a looming trade war with China and/or the European Union concerns us. We are hopeful that the administration’s pressure tactics do not backfire and create a massive headwind for global trade and economic prosperity. Other issues to keep in mind include: political gridlock, tight monetary policies, currency volatility, immigration, tariff implications with other countries, BREXIT negotiations, and escalating geopolitical tensions. As always, we remain watchful!
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. 
With kindest personal regards, I am
Very truly yours,



[1]Source: Federal Reserve System, FOMC Meeting Minutes, June 12-13, 2018.





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