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The first three months of 2018 were very entertaining if you like market volatility and drama. January started the year off strong as we saw equity market gains across the board. February and March were both negative months with markets experiencing greatly increased volatility, including two trading days in which the Dow Industrials lost over one thousand points. Higher interest rates and increased fears of inflation caused the bond market to also drop during the first quarter. This was one of those quarters where gains were hard to come by regardless of how you were invested.

The current bull market began nine years ago during the Great Recession of 2008-2009. During this nine-year run, the equity market has had a few corrections, defined by a 10% drop. In February the market dropped 10% from its January highs, rallied, and then fell to the 10% level once again. In times like these the question is always, “Is this a temporary pull back and thus a buying opportunity?” or “Is this the early stages of a deeper sell off and thus a chance to sell?” We believe the answer depends on your time horizon. The stock market is highly priced right now and a deeper sell off would not be surprising. However, we also feel that we remain in the midst of a longer-term secular bull market that has more time to run.

Another year in the books. 2017 ended with strong equity markets as the eight-year bull market continued to impress. Global stocks did especially well as economic conditions improved around the world. The bond market produced small gains, as it has for the past few years, as the prospect for rising interest rates kept gains in check. The equity markets experienced relatively low volatility, with the best one day gain for stocks during the year being 1.4% back in March, while the worst one day drop was a loss of 1.8% back in May.

We pointed out a year ago that the current economic expansion is one of the longest expansions since World War II. A year later nothing has changed. Economic growth has continued as has new job creation. Corporate earnings remain strong and most measures of economic activity continue to look good. Based on the economic data we are seeing, an economic recession seems unlikely in the upcoming year.

The stock and bond markets both produced gains during the third quarter as investors continue to be optimistic about the U.S. economy.  Corporate earnings remain strong and inflation remains low.  Both factors combine to produce a good economic environment for the capital markets.

The third quarter was notable for producing two devastating hurricanes, Harvey and Irma.  Combined, these two storms caused an estimated $290 billion in damage to Texas and Florida.  Lost economic activity is likely much more than this.  This is the first time in history that two category 4 or higher hurricanes have hit the U.S. mainland in the same year.  One in every seven cars in the Houston area was destroyed by Harvey and 25% of all homes in the Florida Keys were destroyed by Irma.  The damage done and the lives affected by these two storms is truly remarkable.  We have many clients in both Texas and Florida.  Fortunately, all made it through the storms with no physical injuries and relatively minor property damage

The stock and bond markets continued their winning ways this year as the U.S. equity markets set multiple record highs during the second quarter.  The bond market rose during the quarter, pushing yields lower.  We are seeing mixed, although mostly favorable economic data, which is providing the fuel for stocks to rise.

Falling interest rates are usually a sign the bond market is forecasting a slowing economy, while rising stock prices are a sign the equity markets are forecasting a growing economy.  It is interesting to look at the factors that are giving us these seemingly opposite outlooks.  Stocks, in the short run, are very volatile as investors discount the likelihood of various things happening.  Our economy has been growing since 2009 and optimism has been growing for eight years.  It is worth noting, however, that 40% of the gain this year in the S&P 500 is due to just four companies.  This latest uptick does not have broad market breadth, which is usually a warning sign that the rally is not sustainable.  As we have stated in our past few letters to you, we are also seeing signs that are typical of a late bull market run.  Bond yields have been dropping as we are seeing little evidence that the tight labor markets are leading to rising wages, which suggests that inflation remains in check.

The stock market stormed out of the gate during the first two months of 2017 as hopes regarding fewer business regulations and increased consumer confidence fueled investor’s optimism for equities. The bond market was flat during the first quarter as increased inflation expectations and higher interest rates were a drag on bond prices.

The Federal Reserve raised interest rates during the first quarter for the first of what is expected to be multiple rate increases during this year. The economy continued the expansion that has been underway since 2009, allowing the Fed the ability to hike rates. Most analysts are projecting a pickup in inflation over the next two years and this is the primary catalyst for increasing interest rates. Another factor is the very low unemployment rate, which can be inflationary with a growing economy. As we have said before, the Fed has the very difficult job of keeping the economy growing but preventing it from growing so fast we have high inflation. This can be a difficult job to manage.

The stock market stormed out of the gate during the first two months of 2017 as hopes regarding fewer business regulations and increased consumer confidence fueled investor’s optimism for equities. The bond market was flat during the first quarter as increased inflation expectations and higher interest rates were a drag on bond prices.

The Federal Reserve raised interest rates during the first quarter for the first of what is expected to be multiple rate increases during this year. The economy continued the expansion that has been underway since 2009, allowing the Fed the ability to hike rates. Most analysts are projecting a pickup in inflation over the next two years and this is the primary catalyst for increasing interest rates. Another factor is the very low unemployment rate, which can be inflationary with a growing economy. As we have said before, the Fed has the very difficult job of keeping the economy growing but preventing it from growing so fast we have high inflation. This can be a difficult job to manage.

When we wrote our last quarterly letter to you at the end of June, capital markets around the world were in panic mode due to the British voting to leave the European Union.  When was the last time you heard anything about the Brexit?  It is probably safe to say that once the U.S. stock market rebounded after a week, most people moved on and forgot this even happened.  With election dominated news, our normal financial reporting has been replaced with political propaganda.  Fortunately, by the time we write our next letter to you at the end of the year, the election will be behind us and we can (hopefully) get back to financial reports that are more meaningful.

It had been a relatively uneventful quarter for investors until the last week of June, when British voters voted to leave the European Union.  Markets around the world plummeted on the surprise vote.  The Dow dropped 900 points in the first two trading days after the vote; then regained almost the entire amount over the next three trading days.  There is little to do when the markets react like this, and in reality, the Brexit will likely have little impact in the U.S.  It is also worth noting that this was a non-binding referendum, so we do not know what the ultimate outcome of the vote will be.

It may not feel like it, but the U.S. stock market made an historic comeback during the first quarter of 2016.  From its low on February 11th the stock market has rallied more than 11%, wiping out the losses for the year.  This is the biggest quarterly comeback for the market since 1933.  The bond market has continued to be volatile but ended the first quarter with modest gains as interest rates fell during the quarter.

2015 was a frustrating year for investors.  Both stocks and bonds experienced lots of ups and downs, but ended the year with very little to show for it.  Continued economic growth gave us the gains, while questions regarding future growth rates, particularly around the world, gave us the losses.

Economic growth in the U.S. grew roughly 2.1% during the past year.  While positive, GDP growth slowed late in the year. Strong employment gains throughout the year lowered the unemployment rate to 5%.  Also in the U.S., strong consumer spending and continued debt reduction added to our economic growth.  The other big economic news during the year was the FOMC raising the Fed Funds rate for the first time in nine years.