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Investment Letter

3rd Quarter 2018

October 1, 2018

10 years ago, the collapse of Lehman Brothers ignited a liquidity crisis that led to the most significant financial and economic downturn since the Great Depression.  Fortunately, a global meltdown was averted, but it took some aggressive policies by regulators, politicians, and central banks to stave off the nightmare.  The road to recovery was a long and arduous process, but the global economy emerged stronger and investors are reaping the benefits of prosperity.

As we push into the last quarter of the year, the domestic financial situation has improved.  The current bull market rally, that started on March 9, 2009, became the longest on record in August. Additionally, the S&P 500 Index appreciated in price by more than 330% from the low point in 2009 through the end of September 2018.  Large and small cap domestic equities were dominant in the third quarter.  Consumer discretionary, health care, and information technology stocks powered the solid performance in these areas.  The Dow Jones Industrial Average (DJIA) and S&P 500 Index both set record closing highs in late September.  As of September 30, 2018, the DJIA closed at 26,458.31 points and the S&P 500 closed at 2,913.98 points.

The table below recaps the performance of major indices:


Asset Class


3rdQtr. 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


The 2018 U.S. economy remained resilient.  Fundamentals were strong despite a maturing expansion.  Consumer confidence increased to an 18-year high; GDP grew; tax cuts fueled additional profit growth; manufacturing expanded; low unemployment, tight labor market conditions and tame inflation supported growth; the housing market continued to struggle; the Fed raised rates again and U.S. bond yields ticked higher.


See the economic indicators below for additional information.  



4.2% Growth (annual rate) – 2nd Quarter 2018



2.2% CPI (less food and energy) and 2.7% CPI (all items)

year-on-year August 2018


Interest rates

September 2018 increase 0.25%.

Federal Funds Rate range = 2.00 – 2.25%



Unemployment at 3.9%; 201,000 non-farm payroll jobs added in August; Labor force participation rate 62.7%; Professional & business services, health care, wholesale trade, transportation and warehousing, and mining were positive contributors to job growth.



Manufacturing activity continued to expand. After reaching a 2018 high in August, the ISM Manufacturing Index decreased 1.5% in September. Tariff related issues remained a concern industry wide.


Business Spending

Private non-residential investment continued to trend upward; New durable goods orders increased 4.5% in August (Highest reading since July 2014).


Corporate Profits

2nd Quarter 2018 - U.S. corporate profits increased 3.0%. (6 consecutive quarters of growth).

S&P 500 Earnings per share = $38.65



New home sales increased 3.5%; Housing starts up 9.2%; Existing home sales were flat, but inventory was up; Median sales price of existing homes sank for second straight month; Building permits fell 5.7%; MBA fixed 30-yr mortgage rates = 4.96% 


Consumer Spending

Disposable income remained strong; Consumer confidence increased in September close to an 18-year high; Retail and food services sales were flat; Total vehicle sales spiked higher after a two-month decline; Personal durable and nondurable spending increased; Savings rate = 6.6%.



Oil price (West Texas Intermediate) = $73.16/bbl – 9/28/2018; Gas price (U.S. average regular unleaded) = $2.86/gal – 10/1/2018



Recent data showed some improvement in international economies, but 2018 growth expectations continued to disappoint.  Warmer weather in the United Kingdom boosted activity recently, but the improvement will be temporary. Brexit uncertainties remain a major headwind as the March 2019 deadline to leave the European Union approaches. Growth in the Eurozone stabilized but was softer compared to last year.  Data from Japan showed growth rebounded above the expected pace. Prime Minister Shinzo Abe was re-elected in a landslide and the “Abenomics” plan of monetary easing, fiscal stimulus, and structural reforms seems to be slowly working.  China’s growth remained strong but is slowing due to a mature economic cycle, structural reforms, U.S. trade war, and a cooling housing market.  Emerging markets remained mixed due to trade tensions, currency turbulence (stronger U.S. dollar), and election uncertainties.


Our outlook for the domestic economy is positive, and we believe the economic expansion will continue.  Consumer optimism is high, interest rates are rising but still historically low, and global growth is improving.  The growth in earnings will diminish as tax reform effects lessen, and we expect a return to a slow and steady pace for 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 potential improvement in the housing market should be additional contributors to growth.  Oil prices have increased over 20% since the start of the year, but the volatility in price has moderated.  The potential for unexpected shocks to the oil market remain elevated, but over the short-term, we expect prices to remain range bound, and we anticipate supply and demand levels to balance toward equilibrium.  Due to strong economic fundamentals, the rising rate environment will continue as the Federal Reserve tries to keep the economy from overheating.  We are anticipating one last rate hike this year in 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.


The impact of domestic and international risks on the global economy can be powerful. We have identified and are diligently monitoring the following threats: fiscal and monetary policies, restrictive trade (tariffs), energy price shocks, aging workforce, Brexit negotiations, China’s growth and financial risks, extreme weather events, natural disasters, cyberattacks, terrorism, and escalating geopolitical tensions.  In summary, we believe the global economy is in good shape.  Recession risks remain low and financial conditions should continue to be favorable for investors.  As always, we remain watchful!


Be prepared to handle some new issues when considering any 2018 year-end tax planning strategies.  The 2017 Tax Jobs and Cuts Act lowered tax rates, nearly doubled the standard deduction, and reduced or eliminated many itemized deductions.  The list below highlights some additional facts.


•   Interest deductibility on mortgages created after January 1, 2018 now limited to debt up to $750,000.

•  Eliminated deductions include: Personal exemptions, foreign real estate taxes, alimony payments for divorcee decrees finalized after 2018, and interest on home equity loans unless the loan is used to “buy, build, or substantially improve” the home that secures the loan.

•   Deductions for miscellaneous items such as unreimbursed employee expenses, tax-preparation fees, investment advisory fees, and the cost of safe deposit boxes are no longer allowed.

•   Casualty and theft losses only allowed in federally-declared disaster areas.

•   Deduction for any combination of residential property, income, or sales tax capped at $10,000.

•   Child tax credit increased to $2,000 for each child under 17 years of age.

•  The charitable contribution deduction was enhanced up to 60% of AGI for cash contributions to public charities.

•  $10,000 a year from a 529 plan can be used on tuition for kindergarten through high school.


A significant change for many taxpayers this year will be the ability to itemize deductions.  The reduction and elimination of itemized deductions coupled with the new standard deduction limit ($12,000 for individuals and $24,000 for married couples) will reduce the number of taxpayers that have enough qualifying expenses.


Additionally, a review of your W-4 is a good practice in any tax year, but especially in 2018.  The effect of the new tax law could mean you are not withholding enough tax from your pay.  The IRS offers a withholding calculator on their website that can potentially help you avoid a surprise tax bill.


Despite the recent tax law changes, there are still several techniques available to help reduce your tax liability. Consider the following:


•   Gift appreciated property.

•   Contribute the maximum amount to retirement plans.

•   Manage investment gains and losses.

•   Check estimated tax payments to avoid underpayment penalties.

•   Take required minimum distributions (RMDs) by the deadline.


Consult your tax advisor for specific questions.


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,






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