Kipley Lytel CFA I Weekly S&P 500 Stock Market Analysis, Commentary, Insights, Recap Overview by Kip Lytel, CFA I Equity Market Advice Monthly 2018

Monthly Stock Market Summary & Weekly S&P 500 Update August 2019

8/3/2019

-August 16, 2019 Weekly Capital Market Update. Largely spurred by 2/10 year treasury yield curve inversion and geopolitical tensions the markets posted another week of losses: the S&P 500 Index fell -1.03%, the Dow fell -1.53% and the Nasdaq lost -0.79%. With the 10-year Treasury yield slumping to 1.58%, leaving it even further below the 3-month T-bill rate at 1.95%, the NY Fed’s recession model (based on that yield spread) suggests the odds of an economic contraction have risen to 37%. Inversion is considered a reliable harbinger of recession in the U.S., within roughly the next 18 months. On the other hand, the S&P 500 is still up by close to 10% over the past 12 months. With the notable exception of 1980, every recession in the past 50 years was preceded or accompanied by a sizeable selloff in equities. BofA’s investment team released the following: "Our official model has the probability of a recession over the next 12 months only pegged at about 20%, but our subjective call based on the slew of data and events leads us to believe it is closer to a 1-in-3 chance." Beyond the global and macro considerations, the fact remains is the world economy is still growing, albeit at a less healthy pace than in 2018. Insofar as U.S. businesses are pulling back some, jobs are plentiful, wages are picking up, credit is still easy and with cheaper oil then the U.S. consumers have money to spend. Starting through the major sectors of the economy, consumer spending has been a solid foundation for U.S. economic growth. Indeed, consumer spending has increased by +3.9% over the past 12 months, with the most recent four months even better. Disposable income grew even faster, up +4.7%, bringing the savings rate up. This sets the foundation for our economic engine and if the Fed stays supportive while the consumer continues to spend, the near-term odds of tipping into recession is low. Also, Warren Buffet is still buying and we wouldn’t want to bet against his track record.

-August 9, 2019 Weekly Capital Market Update. An uptick in trade war rhetoric continued to add downward pressure on equities: for the week, S&P 500 Index dipped -0.46%, Dow Jones Industrial Average fell -0.75% and the Nasdaq declined -0.56%. China’s yuan currency tumbled Monday, breaching a level long described by market watchers as a “line in the sand” and feeding fears of an intensifying China-U.S. trade war. The U.S. economy is also showing signs of potential slowing as companies are indicating delayed plans for new investment; however, lower rates have been a bump for real estate and would make the cost of corporate borrowing more attractive. Viewed as a safe haven by investors in uncertain times, gold prices have now jumped above the psychological threshold of $1400 per ounce. Likewise, the flight of capital to safer U.S. Treasuries moved the yield on the 10-year Bond to a three-year low of 1.71%. The spread between three-month bills and ten-year Treasuries has widened to minus 32 basis points. A yield curve inversion has preceded every recession for the last 50 years. However, the degree and duration of the inversion needs to extend much further to glean anything meaningful.

-August 2, 2019 Weekly Capital Market Update. The markets declined on fears of further U.S. economy damage from escalating trade tariffs with China after President Trump voiced frustration over trade negotiations by threatened to implement a 10% tariff on September 1st for the remaining $300 billion of Chinese exports not already subject to tariffs. In response, S&P 500 Index fell -3.10%, Dow Jones Industrial Average -2.60% and Nasdaq declined -3.92% on the week. On Wednesday, the widely anticipated Federal Reserve cut to effect, lowering the fed funds rate by -25 basis points. Fed Chair Powell also added some backdrop forward looking statements: “I said it’s not the beginning of a long series of rate cuts. I didn’t say it’s just one or anything like that.” Over 75% of companies in the S&P 500 have reported earnings and of these, 76% exceeded analysts’ modest expectations by more than 6%.

Monthly Stock Market Summary & Weekly S&P 500 Update July 2019

7/6/2019

-July 26, 2019 Weekly Capital Market Update. For the week, the S&P 500 Index +1.65%, Dow Jones Industrial Average +0.14% and the Nasdaq’s finished +2.26%. With about a quarter of the S&P 500 companies ($SPX) having reported 2Q earnings, 77% have beaten analyst EPS estimates to date; which is above the 5-year average of 72%. However, $SPX is reporting revenue growth of 4.0% in Q2 2019, which would be the lowest revenue growth for the index since Q3 2016. This week the International Monetary Fund (IMF) revised growth projections by increasing GDP in the U.S. from 2.3% to 2.6%.  As for China-U.S. trade negotiations, talks are expected to resume next month, and in a sign of good faith, China is resuming imports of certain U.S. products without imposing tariffs. The UK’s new Prime Minister, Boris Johnson, made his intentions clear to implement Brexit by the October 31 deadline - with or without an agreement.

-July 20, 2019 Weekly Capital Market Update.  For the week, S&P 500 returned -1.23%, the Nasdaq lost -1.18%, and the Dow Jones Industrial Average declined -0.65%. Heading into earning season, analysts have a downtrodden expectation of -3% decline in earnings. Also, the expected rate cut by the Fed Reserve had already been baked into market valuations with last week's gains.

-July 12, 2019 Weekly Capital Market Update. The markets reacted positively to comments by Fed Chair Powell along with Wednesday’s release of June Minutes which indicated that the Fed would be willing to cut rates if risks and uncertainties “continue to weigh on the economic outlook.” Many interpret those comments - along with "The bottom line for me is that the uncertainties around global growth and trade continue to weigh on the outlook.. In addition, inflation continues to be muted. And those things are still in place” - to suggest a likely -0.25% rate reduction in the Fed funds rate at the meeting slated at month’s end. Accordingly, Dow Jones Industrial Average led all market indices gaining +1.52% followed by Nasdaq +1.01%, and S&P 500 Index +0.78%. This month marks the longest economic expansion in U.S. history, surpassing the previous record holder, which was Mar 1991-Mar 2001. Also, there are positive historical guideposts in place: when stocks have a good first half (and they surely have), then they are 60% more likely to finish the year strongly as well. Second-quarter earnings season opened with a few early reporters with Pepsi (PEP) and Delta (DAL) beating earnings estimates. However, eyes are now focused on next week where there will be 50+ companies reporting, including most major banks; this will offer a better insight on the overall directional health of our economy.

-July 5, 2019 Weekly Capital Market Update. On the holiday truncated trading week the US equity markets closed near their record highs with the S&P 500 +1.7%, the Dow Jones +1.3% and the Nasdaq finishing +1.9%. The positive index returns were partly fueled by news that the U.S. and China agreed to suspend new tariffs and resume negotiations. There is also plenty to be encouraged by in the job market with U.S. labor force participation ticking higher last month with yearly average monthly growth being 172k; the current pace of job growth is also more than sufficient to push the unemployment rate below 3.5% by the end of 2019. The strong rebound in June’s job growth bodes well for consumer spending and GDP growth ahead. The Fed will continue to play the lead role for driving investor expectations while the central bank's responsive policy approach should breathe further life into the current equity valuation expansion. Recall, first quarter 2019 (1QFY19) earnings were expected to decline -2%, but there was actual growth of +1.6%, which is consistent with the “upside surprise” around quarterly SP 500 earnings. For the current second quarter 2019 (Q2FY19) earnings, the expectation is +0.3% increase, but the “actual" Q2FY19 results could be upside surprise again of around +3% range.

Monthly Stock Market Summary & Weekly S&P 500 Update June 2019

6/1/2019

-June 28, 2019 Weekly Capital Market Update. The S&P paused and finished flat but on a negative tone for the week yet remains up 17+% for the year. Here is the weekly equity index performance scorecard: The S&P 500 Index declined -0.31% followed by Nasdaq ‑0.32% and Dow Jones Industrial Average -0.45%. This lackluster week is emblematic of the market awaiting news from Presidents Trump and Xi Saturday meeting in Japan. Turning to the corporate health-card, estimated earnings decline for the S&P 500 is -2.6%. If -2.6% is the actual decline for the quarter, it will mark the first time the index has reported two straight quarters of year-over-year declines in earnings since Q1 2016 and Q2 2016. However, so far of the 20 of the companies in the S&P 500 reporting actual results for the quarter, 17 companies have reported a positive EPS surprise and 14 companies have reported a positive revenue surprise. With small business optimism still on the rise, job openings still high, an accommodative Fed system with financial conditions loosening - and with no significant tariff earnings pain yet to materialize – then, perhaps the valuation bar should be set fairly high given the potential for multiple rate cuts this year.

-June 21, 2019 Weekly Capital Market Update. The U.S. equity market rallied for the third consecutive week on news that Presidents Trump and Xi would meet at next week’s G20 summit in Japan, along with the Fed’s new dovish tone toward moving interest rates lower. For instance, the Fed removed the term “patient” in its outlook and added “act, as appropriate, to sustain the expansion.” For the week, the Nasdaq led all indices with gains of +3.01%, followed by the Dow Jones +2.41% and S&P 500 Index +2.20%. Again, we find that the Fed is dictating market sentiment and this bias has overcome tariff concerns; most investment strategists don’t foresee any significant trade developments before next weekend’s G20 summit.

-June 14, 2019 Weekly Capital Market Update. Domestic stocks edged higher on the week with no significant news on tariffs or corporate results (quiet period): S&P 500 Index +0.47%, Nasdaq gained +0.70% and the Dow Jones Industrial Average +0.41%. However, saber-rattling emerged as a geopolitical risk with allegations surrounding Iran’s active role in terrorizing oil tankers. While the economy remains stable, analysts forecast second quarter GDP to be down to the +1% range, while investors will look to upcoming commentary and guidance on the tariff impact from corporate heads during earnings calls next week (Tuesday 205 companies report); estimated earnings decline for the S&P 500 is -2.5%. Also, the markets are also awaiting news from the both the June 18-19 scheduled Fed meeting (probability July rate cut 83%) and later in the month, the G20 meeting - Trump indicated he intends to have a powwow with Xi of China.

-June 7, 2019 Weekly Capital Market Update. After four weeks of consecutive market losses, this week, Federal Reserve Chairman Jerome Powell promised to “closely monitoring the implications of these [tariff] developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.” We have often written that “don’t fight the Fed” and even in the throws of potential tariff disruption there is an overwhelming bias toward an accommodating Federal Reserve and cheap money. Accordingly, the Dow Jones Industrial led all indices with a +4.71% gain followed by the S&P 500 Index +4.41% and the Nasdaq +3.88%. The market rejoiced the potential of cheaper money (again) in the face of indication of potential hiring slowdown and slowing wage growth (to 3.1%) amid trade tensions with only 75,000 jobs added in May. Also, the World Bank recently revised 2019 estimates of global economic growth from 2.9% from 2.6%. While the S&P 500 companies remain in the quite period before the impending 2nd quarter earnings, the EPS estimates for Q2 has declined by -6.6% over the past 12 months, and by -2.2% since the 1st quarter.

-June 1, 2019 Weekly Capital Market Update. The markets like order and transparency, yet the expanded use of tariffs has caused disorder. First, there was the breakdown in U.S. and China negotiations, then tariff threats on European and Japanese autos and now the latest threat of tariffs on imports from Mexico, our major trading partner; this reinforces trepidation about whether tariffs will ultimately undermine global economic growth. Indeed, President Trump announced plans to impose tariffs on all imports from Mexico in an effort to stop migrants crossing into the U.S. The tariff, effective June 10th, would begin at 5% and escalate at 5% intervals to a maximum of 25% in October. The markets responded negatively with a 4th week where all major U.S. equity indices declined: S&P 500 Index -2.62%, Nasdaq -2.41% and Dow Jones Industrial Average -3.01%.

Monthly Stock Market Summary & Weekly S&P 500 Update May 2019

5/4/2019

-May 24, 2019 Weekly Capital Market Update. U.S. equity markets were marked by a third week of losses on the heels of ongoing escalation with China-U.S. trade tariffs. The negative earnings impact is worrying U.S. companies; also geopolitical risk has spiked with the U.S.-Iran tensions in the Persian Gulf. Thus, the Nasdaq fell -2.29%, S&P 500 Index dropped -1.17% and the Dow Jones Industrial lost -0.69%. Mixed corporate earnings results from retailers contributed to the negative market tone. In terms of sectors, energy stocks performed worst within the S&P 500 Index, as oil prices suffered most with largest declines. In turn, defensive utilities were the stand out performer by banking record gains. Trade volume was rather low on the week and this may indicate that many investors remain on the sidelines and the markets’ current low expectations for a quick tariff resolution suggest that positive developments on trade could create a rebound in equities. Indeed, the technical pattern of this selloff feels more like a buyers’ strike than outright institutional selling. On the economic front, new home sales volume turned positive year-over-year and may yet finally contribute (positively) to GDP in 2019.

-May 18, 2019 Weekly Capital Market Update. Though markets rallied in the second half of the week, the U.S. equities could not overcome the sharp early-week losses: S&P 500 -0.76%, Dow Jones -0.69% and Nasdaq -1.27%. There is no clarity at this time as to resumption of U.S.-China tariff trade negotiations and equities values struggle with uncertainty (so far the depth of this pullback is measured at -4.5%). While the tariff toll tallied $4.4 billion per month in 2018, the tariff pales in comparison to the total U.S. consumer spending power of $14 trillion.

-May 10, 2019 Weekly Capital Market Update. The U.S. equity markets retrenched past gains after trade tensions unexpectedly escalated: S&P 500® Index -2.18%, Nasdaq declined -3.03% and Dow Jones Industrial Average -2.12%. U.S. trade negotiators reportedly told President Trump that China was backing away from some key commitments to a developing trade agreement and by Sunday, President Trump tweeted that trade negotiations with China were moving too slowly; he then later announced a tariff increase (from 10% to 25%) on $200 billion of Chinese imports effective Sunday. Both parties hit the negotiation table again until late Thursday and when an agreement failed to materialized, the U.S. initiated a 25% tariff on an additional $320 billion of imports from China. Trump is leveraging the strength of the U.S. economy to effectuate necessary systemic changes of fairness with China business and trade. From our prospective, the long-term potential benefits outweigh what appears to be current market stress and the market is simply revaluing both the lower likelihood of fast timetable and perhaps a reduced level of success (trade terms). What is also apparent is the first round of tariffs did not negatively impact U.S. GDP (Q1) and therefore this has emboldened the U.S. trade negotiations team. Finally, and again from our view, should this trade tariff exchange escalate, the markets would anticipate compensation by the Fed with a rate cut – this would likely offset a good amount of the tariff disruption costs overall. This equation is evident given at least on two trade days last week we had the markets down significantly, then a sizable recovery in the last hour of trading (indicating institutional “smart” money buying the dip).

-May 3, 2019 Weekly Capital Market Update. For the week, U.S. equity markets finished mixed, with the Nasdaq +0.22%, S&P 500 Index +0.20% and the Dow Jones Industrial -0.14%. The market continues to absorb the benefits of a Goldilocks economy, which is not too hot, yet not too cold – that usually is the ideal ingredients for growth and no Fed rate increases. The drivers of the market rally has been: 1) positive earnings surprises (76% of S&P 500 companies have reported a positive EPS surprise), 2) low inflation (1.6%), 3) accommodating Fed (no prospective rate hikes), 4) Q1 productivity grew at a hefty 3.6% pace, versus the 1.3% clip in Q4 and 5) near full employment economy (unemployment at 3.6%).

Monthly Stock Market Summery & Weekly S&P 500 Update April 2019

4/1/2019

-April 26, 2019 Weekly Capital Market Update. The S&P 500 Index reached a record high this week as the market rebound continues: the S&P 500 rose +1.20% while the Dow Jones Industrial Average dropped -0.06%. First quarter (1Q) 2019 real GDP surprised to the upside at 3.2% (2.3% expected), but was driven more by Inventories and trade as opposed to the overall corporate earnings growth. This explains how GDP can rise while corporate earnings are depressed. While the S&P 500 is reporting its first year-over-year decline (-2.8%) in quarterly earnings since Q2 2016 Mr. Market remains focused on the glass half full, such as 77% of S&P 500 companies have beaten EPS estimates for Q1 to date. Approximately 38% of companies in the S&P 500 have reported quarterly results and the market continues to embrace that earnings, though down, are better than expectations, or just falling -2.8% vs. the projection of -4.2%.

-April 19, 2019 Weekly Capital Market Update. The S&P 500 returned +0.60% on the week and sits less than 1% off the highs, showing the broad equity market index continues to face resistance at the prior highs. Not only is the S&P 500 still fighting resistance these past weeks, but the index has also has been marked by relatively calm volume and volatility. It is obviously apparent that from a technical standpoint the market brushed off the much-hyped Mueller report as inconsequential. As for first quarter earnings, the S&P 500 is reporting revenue growth of +5.0% in Q1 2019, which would be the lowest revenue growth for the index since Q4 2016; earnings are on a pace with about a -4% decline. The forward 12-month P/E ratio for the S&P 500 is 16.7. This P/E ratio is above the 5-year average (16.4) and above the 10-year average (14.7).

-April 12, 2019 Weekly Capital Market Update. The S&P 500 reached an important milestone on Friday when the Index crossed 2900 for the first time since last October; the broad market index finished +0.51% on the week. The equity markets were supported by a positive start to earnings season and this may bode well for corporate commentaries on expectations for the remainder of 2019. Additional market stability stemmed from the FOMC minutes where Fed officials largely approved a "patient" approach to monetary policy going forward.

-April 5, 2019 Weekly Capital Market Update. China’s release of strong economic data on Sunday set the stage for across-the-board market for the week, which was also aided by Monday’s upbeat comments from U.S. and Chinese officials on the progress of trade negotiations: S&P 500 Index +2.06%, the Dow Jones Industrial Average +1.91% and the Nasdaq 2.71%. The S&P 500 is now only 1.5% off its all-time-high from August of last year. Next week brings first quarter earnings season where financials are the first early indicators with JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC). Estimated earnings are expected to decline for the S&P 500 by -4.2%; this would mark the first year-over-year decline in earnings for the index since Q2 2016.

Monthly Stock Market Summary & Weekly S&P 500 Update March 2019

3/2/2019

-March 29, 2019 Weekly Capital Market Update. For the week, all U.S. equity markets gained ground on resumed trade talks with China and ECB’s Draghi’s easy credit schemes for the EU: S&P 500 +1.20%, Dow Jones Industrial +1.67% and Nasdaq +1.13%. The markets also reacted favorably to the National Economic Council Director comments by Larry Kudlow suggesting that the FOMC should pursue an immediate half percent rate cut to protect economic expansion. The markets celebrated the well-received Lyft IPO on Friday - Lyft raised the offering price from the mid-60s to $72 and the stock then closed up +8.74% on Friday. In Europe, the future of Brexit remains uncertain as Prime Minister May’s latest attempt at Parliamentary approval for Britain’s withdrawal agreement with the EU failed. Recent equity market trading has moved toward a tighter range (S&P 500's trade range was 2,800-2835) on moderated volume and this seemingly indicates the market is waiting for a new directional catalyst – perhaps when earnings season begins in the 2nd week of April this will bring data dependent direction. Some weeks ago we halted our incremental de-risking of portfolios as we believe the current portfolio allocation mix is now more properly aligned with the current valuations, fundamentals and risks.

-March 22, 2019 Weekly Capital Market Update. The U.S. equity markets gave back some of last week’s gains with the S&P 500 -0.77%, the Dow Jones Industrial -1.34% and Nasdaq -0.60% - Friday brought red to this week’s index performances. This leaves the S&P with a gain of about 12% for the year, but still 4-5% from the all-time highs from last year. Equity traders were rattled on Friday by the first trigger of an inversion of the treasury curve since 2007; 10-year and three-month Treasuries , which on Friday turned negative, or to -0.196 percentage points. Inversion is considered a reliable harbinger of recession in the U.S., within roughly the next 18 months. The Fed meeting yielded no change in policy and the updated guidance from the FOMC indicated no potential rate hikes for 2019, and perhaps "only" one hike for 2020. The 10-0 decision held the target range of the federal funds rate steady at 2.25 percent to 2.5 percent. Fed Chair Powell has certainly flipped his stance in a short period of just 4-months from 4 rate hikes to now no hikes in 2019, and the stock market is interpreting this sharp ‘dovish’ policy change as a Fed that is now 100% backing Mr. Market. The Fed also downgraded its economic assessment: “Economic activity slowed from its solid rate.” Powell expressed that the Fed will remain patient and watching data, but (at this time) is not seeing any data to do anything and if they do see anything, then they will act accordingly. “It may be some time before the outlook for jobs and inflation calls clearly for a change in policy.” The FOMC also chose to reduce its balance sheet to $3.5 trillion with the plan of selling about $600 billion, with the winddown scheduled to end this September. 4th quarter earnings season is over, and unless we get a market moving headline like on trade, or new eyepopping economic data indicators, then we don’t see any significant catalyst on the horizon to move the market near-term. Until then, we have Trump news of no "indictment" in the Mueller report, which should bode positive for the markets early next week - Trump has a clear pro-business and pro-capitalism policy stance.

-March 15, 2019 Weekly Capital Market Update. The U.S. equity markets recovered last week’s losses with the S&P 500 +2.89%, Dow Jones Industrials +1.57% and Nasdaq +3.78% on the week. While U.S.-China trade discussions continued there were no significant developments other than an expected agreement in April, along with some new rights for foreign companies operating in China. Recall, the Fed has paused its rate hikes and may not even hike in 2019 since economic fundamentals have just begun to show cracks. It started with housing, then job growth for February, and now it is jobless claims. Jobless claims rose by 6,000 last week after a long stretch of falling numbers. However, the equity markets appear to be indicating a preference toward accommodating Fed over the potential of a mild recession. The global economy has hits its weakest spell since the financial crisis; GDP tracker puts world growth at 2.1% on a quarter-on-quarter annualized basis, down from about 4% in the middle of last year. Moreover, full-year earnings per share forecasts for S&P 500 companies are likely to further fall, perhaps between -4% and -5%, which could put added pressure on the index. "Earnings revision breadth has been some of the worst we have ever witnessed with both sales and margin guidance coming down across all sectors," Morgan Stanley's chief U.S. equity strategist, Michael Wilson, says. "It also means there probably isn't as much slack in the economy as many investors think and as depicted by the cost pressures now evident."

-March 8, 2019 Weekly Capital Market Update. U.S. equity markets were hit with the first four-day loss, along with the largest weekly loss for the year: S&P 500 Index -2.16%, Dow Jones Industrial -2.21% and Nasdaq -2.46%. Concerns about softer global growth and fading hopes of a U.S.-China trade agreement sent share prices lower. Also, concerns of potential economic headwinds on the home front were sparked by February’s jobs report, badly missing expectations as the economy added only 20,000 non-farm jobs while economists expected 175,000. We have emphasized a number of times that it is our view that equity valuations have been getting ahead of themselves and were not aligned with current (& forecasted) economic trends, both domestically and abroad. In fact, we had telegraphed a hedge last week on short exposure to real estate, and are now sharing another hedge placed (to offset long position exposure) on Monday in gold; we had added new positions in symbol GLD before the market weakness transpired later in the week. We have also been transparent in our view of "feathering" down equity positions as valuations moved ahead of fundamentals and have thoughtfully pursued an incremental de-risking of portfolios. However, should fundamentals elevate or valuations decline to a point we perceive stocks trade at below fair-value, we would look to increase our equity exposure once again.

-March 1, 2019 Weekly Capital Market Update. The S&P 500 closed above 2,800 for the first time in nearly 4-months on trade optimism; negotiations between the U.S. and China may conclude as soon as in two weeks. The Nasdaq led the indices this week with +0.90% gain followed by S&P 500 +0.40%, while the Dow Jones Industrial Average finished -0.02%. On the economic front, manufacturers grew at slowest pace since Trump's election with ISM index falling to 54.2% in February. Consumer sentiment also slipped in late February according to The University of Michigan; index declined to 93.8 in late February from 95.5 earlier in the month. Another economic headwind was marked by a repeated patch of really rough data on the U.S. real estate market. The new housing data from December has just been released, and shows a clear negative trend for housing where starts dropped -11.2% in the month, and overall, the market saw the worst price growth since 2014. Meanwhile, Atlanta Fed President Raphael Bostic, speaking at the National Association for Business Economics conference in Washington, D.C., said he still expects the central bank to raise interest rates once this year. We still believe that equity valuations are overreaching based on fundamentals and therefore we added a new position on Friday morning as a hedge against some of our long holdings. We purchased a real estate inverse exchange traded fund (symbol: DRV) that is levered, with about 0.5%-1% allocations based on different client profiles. This ETF had hit a lofty net asset value (NAV) of about 6,300 back in 2008 due to the financial crises, but was still up at 1,287 end of 2009 and even as high as 361 at end of 2010. It is now trading at its low of 7.79 NAV and this is where we started entering our positions. DRV is a 3x inverse that has lost big time 9 out of past 10 years. The thesis is if we take a small position with the ETF already down about -30% year-to-date, then the downside exposure is likely limited to about minus 10-to-15% range while the asymmetrical upside is astronomical. For example if it just goes back up to where the market was in recovery back in 2010 at 361, then that is a 52x return.. and if it markets return to losses experienced in the last financial crises of 2008, then that is a 750x return. Back in 2008 we used a financial ETF to be inversely exposed to financial sector with about a 1% allocation and that 1% allocation delivered a meaningful positive return attribute to help offset other losses in long positions that year. We contend real estate valuations are currently a weak link and can be crushed should the clouds on the horizon materialize as problematic; also this is a good entry point to hedge market exposure in many of our client portfolios that fit this degree of risk tolerance acceptability.

Monthly Stock Market Summary & Weekly S&P 500 Update Feb 2019

2/2/2019

-February 22, 2019 Weekly Capital Market Update. Equity markets edged higher on China-U.S. trade prospects with the Trump-XI meet and Fed comments expressing continued uncertainty over future rate hikes: S&P 500 +0.62%, Dow Jones +0.57% and Nasdaq +0.74% on the week. There reportedly was a Memorandum of Understanding on some key China-U.S. trade items and Trump indicated that he may extend the trade deal deadline should there be some earnest progress. The Dow Jones and S&P 500 are now riding a nine-week winning streak - returns for year have both are up over 11% marking the best start since 1987 and 1991. Clearly stocks are "overbought" now, but they can stay that way for a while. However, historically when these equity indices move in sync through Feb, the trend often continues through year-end – at least 60% of the time. The current underbelly of this market recovery is the Fed’s stance toward accommodation, constructive progress on a China trade deal (partly motivated by China taking it in the shorts with its economy) and the overall economic engine. As for the latter category, the current trends are mixed: homes sales/construction down, service industry up, retail sales down (though Walmart knocked it out of the park on earnings), employment steady and at decades’ low for unemployed, Philly Fed dropping to 31-month low of 4.1 (measures changes in business growth), etc. Consensus analyst estimates for 2019 are far more tepid than past years with earnings & sales growth of +4.5% and 4.9%, respectively. We didn’t take our risk allocation down much this past week but will continue to look for days of meaningful market strength to deflate risk exposure in client portfolios.

-February 15, 2019 Weekly Capital Market Update. All U.S. equity markets rallied on the week marked by elevated positive expectations with U.S.-China trade talks and the avoidance of another government shutdown: S&P 500 gained +2.5%, Dow Jones +3.09% and Nasdaq +2.53%. The markets were also aided by Fed commentary reinforcing their intention to maintain liquidity near current levels. The market is also feeding off old economic news as related to fourth quarter 2018 earnings where the S&P 500 ($SPX) is reporting earnings growth of 13.1% for Q4 2018, which would be the 5th straight quarter of double-digit earnings growth. The S&P 500 has recovered from its lows and now site about 6% off the all-time-highs. However, our investment approach has used this impressive Jan-Feb rally to reduce market exposure; we will continue to feather down equity weightings should the market march upward. We believe the market valuations have gotten ahead of themselves (doesn’t mean it won’t go higher) given most of the good news is backward looking. In fact, the S&P 500 EPS estimate for Q119 has declined by -4.8% over the past 12 months and by -5.4% since Dec. 31 and the Conference Board’s Measure of CEO Confidence plunged -13 points to 42 in last year’s 4th quarter; this is the 3rd consecutive drop & now below key recession level of 43. Forward-looking data considerations should take consideration of that fact that more than half of the banks that reported earnings noted tighter standards due to an “uncertain economic outlook” and weak demand for loans. Therefore, we reiterate our stance of keeping powder dry for any market pullback, while also lower risk by investing in this (now) higher yielding fixed-income environment. Another cloud is uncertainties overseas: Brexit (U.K. economy 6-yr low), Italy’s slumbering economy & questionable leadership, economic unrest in France over taxes, etc.

-February 6, 2019 Weekly Capital Market Update. The major equity indices nudged forward with a week marked by increased volatility: S&P 500® Index +0.05%, Nasdaq gained +0.55%, and Dow Jones Industrial Average +0.17%. The markets started the week on a positive trend then were rattled by Brexit and trade concerns. For example, President Trump said that he would not meet with China's President Xi before a March 1st deadline set by the two countries to achieve a trade deal. The remarks dampened growing optimism for a trade deal in the short term and weighed on stocks. However, fundamentals seem intact with earnings results from 66% of companies in the S&P 500 showing growth rate of 13.3%; on pace for a fifth consecutive quarter of double-digit growth. Market focus will continue on earnings reports and the expected Congressional action to avoid another government shutdown which could take effect on February 15th. The S&P now sits 7+% off the all-time highs, and investors are struggling to determine whether the markets can complete the "V" type of recovery from December lows. We reiterate our approach of incrementally phasing down risk during periods of market strength – lowering equity exposure through 2019. The rationale is we expect elevated economic headwinds in 2020 and the market prognosticator will react to any negative events months ahead of the hard data. Case in point, FactSet has revised their S&P 500 2019 year earnings and revenue forecast to +5%, which is far below past periods of double digit growth and certainly inconsistent with expanding equity valuation multiples [see chart below]. From the technical standpoint, sentiment remains positive as buyers have stepped in toward the end of the market trading day to help buy up the dips. Final thought is the market has built in expectations for a high level of corporate stock buybacks in 2019 – probably at least over $600 billion – but Congress has recently indicated intervention to curb this activity. We contend that buybacks are indeed often ineffective use of corporate piggybanks (should go to dividends and capital expenditures), but at the same time this mechanism has been supportive of equity market valuations and should it taper, then equity markets will lose a powerful buyer constituent of stocks.

-February 1, 2019 Weekly Capital Market Update. Stocks had the best January in 32 years with the S&P 500 rising nearly 8 percent in January. For the week the S&P 500® Index rose +1.57%, followed by the Nasdaq +1.38% and Dow Jones Industrial Average +1.32%. The capital markets were supported with relatively strong corporate earnings and the Fed indication that rates will remain stable with a patient approach; expect “ample” balance sheet accommodation. Also, U.S. Treasury Secretary Steven Mnuchin said that if China presents enough trade concessions to President Donald Trump, there is a chance that the administration may seek to lift all tariffs. Equities are likely to be buoyed by continued stock buybacks this year, according to JPMorgan. JPMorgan strategist Dubravko Lakos-Bujas says companies still have large amounts of cash overseas—funds that could be used for buybacks if sent home—and even better, stocks look much cheaper now. Lakos-Bujas wrote in a note on Friday. He predicts that S&P 500 companies will announce another $800 billion in buybacks this year. American companies sent home about $570 billion in foreign cash during the first three quarters last year as a result, but $1 trillion remains abroad and the repatriation will likely continue in 2019, writes Lakos-Bujas.

Monthly Stock Market Summary & Weekly S&P 500 Update Jan 2019

1/1/2019

-January 26, 2019 Weekly Capital Market Update. Equity markets took a pause for the week and finished largely unchanged with the S&P 500 -0.22% and the Nasdaq +0.11%. Fortunately, the equity markets have exited the correction phase experienced in December 2018 and are now 9% off its all time high. It is our 2019 theme to incrementally reduce equity holding exposure and the first phase was executed on Friday where the broad market traded up +6.5% year-to-date. We will look to continue the de-risking portfolios throughout the year and believe some type of U.S.-China deal would be the next material trigger to ignite another bump upward. Flash manufacturing PMI, an early indicator of manufacturing, rose slightly in December. The Fed signaled that it is considering holding more Treasury securities in its inventory than previously planned, which would maintain supportive liquidity in the economy. CEO comments during earnings calls have largely reaffirmed a healthy economic outlook for U.S. businesses with diverse sector leaders reporting solid results: IBM, Starbucks, Proctor & Gamble, etc. However, the international economic engine continues to show weakness.

-January 17, 2019 Weekly Capital Market Update. The U.S. equity market posted another strong week of positive returns on 1st quarter corporate earnings results and improved optimism surrounding a U.S.-China trade deal. The stock market is now out of correction, up 14% since near-term bottom in late December. For the week, the S&P 500 finished +2.9% and the Nasdaq was up +2.7% on the week. The earnings reports from the S&P 500 companies believe that economic conditions remain favorable with no signs of imminent recession. The energy sector and consumer retailer stocks have been the outperformers this past couple weeks. Furthermore, the market has been encouraged by a rate pause by the Fed where interest rates should remain at current levels while the balance sheet is being deleveraged.

-January 11, 2019 Weekly Capital Market Update. This week the Federal Reserve made additional accommodative comments of ‘patience’ in interest rate policies, and with trade negotiations with China showing promising headway, improved investor sentiment drove markets upward: S&P 500 +3.63%, Dow Jones Industrial +2.93% and Nasdaq +2.93%. On the fixed income side, corporate bonds also recovered +0.52% with the BBgBarc US Aggregate Bond Index finishing +0.18% for the week. It appears Wall Street has once again revised their rate increase expectations and, absent increased inflation, interest rates are anticipated to remain at current levels at least through June 2019. Beijing trade negotiations are wrapping up with what has been characterized as a “few good days”; China-US even extended the talks to an unanticipated third day. The markets also embraced the expertise from one of America’s most respected CEOs, JPMorgan’s Jamie Dimon when he stated “the markets may have overreacted” to the whole notion of a possible recession. Dimon further added "My view is that the consumer is in good shape and is continuing to grow, and they have backwinds with jobs and wages going up," and "I think you're going to have decent growth in 2019 in America.. Therefore, sentiment might reverse course at some point in the future." Earnings season begins on Monday and should set the tone for next week’s trading - Citigroup will report and other major banks like JPMorgan will report later in the week. We leave you with the most predictive gauge of recession, yield curve data: the yield curve has yet to show signs of “real” inversion (10-year yields less than 2-year yields), which historically has happened ahead of every recession in the past 40 years. Also, the inversion trigger for a recession is a lengthy timeframe: at least eight months before a recession would surface. BTW, the flattening of the yield curve has occurred many times in history with no meaningful signal on the direction of the economy.

-Key excerpts from our 2019 Market Outlook: Tepid equity sentiment and more reasonable valuations shape our lukewarm 2019 outlook, where we anticipate the S&P 500’s returns to be constrained by mild headwinds: U.S. corporate earnings deceleration, sluggish U.S. growth and potential for 1-2 Fed rate hikes. While we predict a mild economic slowdown, we do not foresee a recession in the U.S. where growth will simply taper. U.S. corporate earnings deceleration and P/E multiple compression is already embedded in the S&P 500 valuations as we enter 2019. We foresee U.S. growth to deceleration from 3.0 to 2.2 percent by year-end. While the central bank has signaled its intention to boost interest rates perhaps two more times in 2019, we see a world where rates could be unchanged or only moved upward by +0.25%. We expect the Fed to react favorability to a modest earnings recession, which is technically two quarters of negative year-over-year growth for S&P 500 EPS. It is particularly important to clarify that earnings deceleration does not translate into the economy being in any real, lasting trouble. We are coming into the year with more reasonable fundamentals with economic growth, though slower, where we believe the capital markets can still be supportive to equity valuations. We also recognize that there will be pockets of economic weakness, such as in housing, construction and recent factory production. Again, we expect continued global growth and moderate inflation over the long-term with similar elevated volatility regime to be present in equities for 2019. Our base projection target for the S&P 500 is 2,650, but with a volatile trading range between 2,350-3,000. Our return forecast for 2019 is +5.7% and this target is partly accommodated by a growth consensus estimate of +7.9% earnings and +5.3% sales for the S&P 500. The forward 12-month P/E ratio for S&P 500 is more reasonable now at 14.2, which is below the 5-year average (16.4) and below the 10-year average (14.6). The takeaway is the recent P/E multiple compression below longer-term averages have left equities values more affordable. We will invest with a little extra caution and keeping our eye on signals for any future trouble brewing, such as widening credit spreads and a flattening yield curves; the latter being an indicator for an economic downturn within 12-to-24 months. As for the credit spreads, we look to the treasury-to-junk bond spread for guidance. For example, in late December of 2018 we saw spreads increase to over 5 points, but this type of spike has also occurred in 2011, 2012 and 2015. In fact, in those past years spreads at times reached as high as the 8.0-point spread range and there was no bear market that followed. The point is that while this is a helpful predictive tool, the credit spread really needs to hit the 8.5-10.0-point risk range for any viable market crash signal. The overall equity allocation, both direct and indirect, will be feathered down for a couple of reasons. First, we have more attractive competing returns from stable fixed income yield than past years - we owe that to the Fed’s rate hikes. Therefore, in this investment climate there is a risk-reward framework where about half of our entire return projection from the equity markets could now be sourced from fixed yield, which would not have exposure to equity-like drawdown risks. We also want to be able to realize profits before the anticipated recessionary forces impact equity markets in late 2019 and early 2020. For this reason, we will be looking to stepwise out of long equity positions and place more of the portfolio in the safety of fixed income, such as municipal bonds, treasuries securities, agency bonds, corporate bonds and CDs.

-As bad as the U.S. stock market ended 2018 with the broad U.S. market S&P 500 index down -4.4%, it still outperformed most major world indexes where MSCI World equity index plummeted -14.1%. It was a roller coaster ride in 2018 with daily price swings that were double the volatility of the unusually placid 2017. And, the losses were not limited to just equities, as the corporate bond index dropped -2.3%, U.S. TIPS -1.27% and the commodity index -10.9%. Therefore, Morningstar’s moderate aggressive target risk index lost -6.74% for the year. The good news is that the stock market is far less expensive on a valuation basis than it was at the start of this year. If we learned one thing in 2018, it's that change is going to bring surprises, and volatility is going to reign supreme for the next couple of years.

Monthly Stock Market Summary & Weekly S&P 500 Update Dec 2018

12/1/2018

-December 28, 2018 Weekly Capital Market Update. The Dow Jones industrial average was having its worst December since 1931 until Wednesday the 26th, when it soared 1,086 points, or +4.98 percent on Thursday — BTW, this was the biggest point gain in history for the Dow. In our view, there is a “TUG-OF-WAR” between: economic data points, where one side (Heads) is showing softening (overseas growth, trade, confidence, year-over-year earnings, etc.) Versus (Tails) strong consumer, wage growth, 8-10% EPS '19 growth and a Fed balance sheet that still has a lot of liquidity. And, much of this battle is around the 2,400 S&P 500 support line (S&P is currently at 2,486). In the end, the S&P 500 finished on a strong positive note for the week, +2.9%. For perspective, the S&P 500 had corrected -19.9% peak-to-trough (from last highest peak 11 wks ago) in less than 90 days and reached roughly the same severity as the 2011 correction, which was -19%. Revisiting this “tug-of-war” theme, from a macro level it is between the Bears and Bulls, where the Bulls are in the camp that the S&P is carving out a bottom; in turn, the skeptic Bears think this is just a pause before another leg down. In between, there is a lot of noise with year-end balance sheet adjustments by institutional and mutual fund money, and computer program trading that exacerbates volatility trends in a “yo-yo” fashion - including "herd" trend-following money that adds even greater volatility fuel. John Templeton once said: “Bull markets are born from pessimism, grow on skepticism, mature on optimism and die on euphoria”. It is our view that it appears we remain in late cycle bull market that never reached “euphoria”, probably somewhere in the latter period of “optimism” before the markets were jittered by a number of uncertainties: Fed policy (more recent clarity, toward “dovish”), trade (uncertainty), slowing global growth (reflected in market valuations), U.S. '19 economic trajectory (~50% uncertainty) and the Trump factor (uncertainty). Our sense is the market has already priced in the revised downward EPS and GDP 2019 numbers, and the volatility that is occurring is the uncertainty about when recession will hit and how that could be magnified on the timing of the proposed trade agreement with China, and whether those deals are meaningful to the GDP. Looking at many of Wall Street’s investment strategists, we believe they are too focused on “leading indicator lists” for a potential recession and miss the larger picture that recessions do not start with unemployment at a 49-year low of 3.7% and the economy growing at around 3%. Keep in mind that not every market correction morphs into a Bear market, just like not every Bear market morphs into a crisis. For better understanding of this recent market Correction let’s look at past Corrections: When S&P 500 hits 10% to 20% losses: 2 to 3 months to bottom, 2 to 6 months to recover losses, no recession. A market commentator that writes under the handle of “Fear and Greed Trader” had an insightful comparison piece snapshot between this year and 2016: “The 2016 drawdown successfully tested the 50 MONTH support line, and so has this pullback. At the lows the S&P in 2016 was 10.6% below the 20-month moving average. The decline this year took the S&P 11% below that demarcation line. A December Fed tightening and the prospect of a delay to further hikes against a backdrop of risk-asset volatility; uncertainty in global growth, especially Chinese growth, oil prices plummeting; and an S&P correction. Oh, and Brexit, which looms ever nearer in March next year. All the same as back then.” Recall, the following year after 2016, the total return was +21.8%. To be clear, the point is much of this uncertainty and volatility has occurred as recent as in 2016; and also to be clear, we do not think returns for 2019 will have any similarity for 2017, as there are many different factors in play going forward. This next week, we will expect volatility to continue and will be keying into oil (energy) as a good directional market indicator, along with keeping a watchful eye on the 2,400-support range for the S&P 500. By mid-January, early fourth quarter earnings season will provide a barometer in gauging both the health of the economy and the outlook for the first quarter of 2019. We leave you with a quick factoid: S&P 500 average return is +1.1% for the month of January based on past years going back to 1928: 57 years of up months to 34 down months. Thus, from the standpoint of past historical trends, the odds are stacked in favor of an upside move; but economic and oil trends will likely lead the directional charge as we enter the New Year.

-December 21, 2018 Weekly Capital Market Update. Marking the tech index entry into bear market territory. The S&P 500 has now exceeded the peak-to-trough decline seen during the 2015-2016 equity market downdraft. Fear mongering media headlines are pervasive with incendiary words like “brace yourself for a crash”, “great depression”, “bear market”, “brutal stock market rout” – without the violent daily market losses (no down days of over -4%), excess risk leverage or treacherous economic “crises” signals. This is why it is important to acknowledge even before we look under the hood of this market that persistent financial market losses can nevertheless nudge along the very recession the market fears by means of lost business confidence by CEOs, growing risk aversion and an general decline in overall investment confidence; even though it isn’t fundamentally justifiable. Now to the meat of our market analysis: The evaporation of about $4.5 trillion in U.S. equities since late September has taken equity valuations from “stretched” back down to more manageable levels with a stronger justification based on earnings and moving toward support by fundamentals. The valuation of U.S. stocks now sits at levels last seen in 2013, with the S&P 500 trading at an estimated forward price-earnings ratio of about 14x, compared with 18x at the start of the year. The current market trends are reminiscent of the 2011 and 2015–16 market downdrafts, which saw volatility spike and the S&P 500 drop over 15% from its peak. However, these recent past downdrafts were 3-5-month blips never derailed the economic recovery nor the bull market, despite the fact that economic growth was signaling a slowdown. What also must be factored in is we are in the time of year where mutual and private funds are “window dressing” holdings before year-end, as fund managers cut the big losers (to avoid reporting on statements) while at the same time investor jitters have engendered redemptions that in turn cause fund managers to also take offsetting profit on relatively strength holdings. The collective message from a variety of leading economic indicators we follow is that the GDP is more aligned with above-trend US growth than recession, which stands at odds with the market’s continued weakness. The most recent released Conference Board’s Leading Economic Index (LEI) stands 5.2% above its level a year ago and the aggregate leading economic indicators are still pointing toward above-trend US growth, and not recession. That said, the market is an astute forward-looking predictor and what is occurring is a discounting mechanism related to growing uncertainty on many fronts: slowing growth overseas, concerns of the impact of higher rates on U.S. economic growth, White House chaos, government shutdown, trade and the Fed reserve rate increase trajectory with focus on whether Powell is capable of engineering a “soft landing”. As for the latter, after-market close comments on Friday by New York Fed President Williams suggested more flexibility on Fed rate stance after he said, “things can change between now and next year.” As for our client portfolios, we have great multi-asset diversity and while things are a bit ugly in the markets right now, we have not yet seen enough evidence to suggest we are not going to have some degree of market recovery in the future. Said in another way, there are likely to be better levels at which to reduce positions if you ascribe higher odds to the likelihood of a near-term recession than we hold. At the same time, we are not chasing risk by selling winning positions or safer fixed-income assets to follow falling prices of tech darlings that now offer more reasonable entry points.

-December 14, 2018 Weekly Capital Market Update. The equity markets have fallen in four out of the last five weeks as investors continue to show pause: S&P 500® Index losing -1.26%, Dow Jones Industrial Average dropping -1.18%, and Nasdaq receding -0.84%. Once again, all of the major indices closed the week in correction territory with losses of 10% or more from recent highs with the S&P now sitting just above the February lows. More than $46 billion was redeemed from U.S. stock mutual funds and ETFs between Dec. 5 and 12, an unusually large weekly outflow which has not been seen in over a decade. However, history also suggests that this type of price action has occurred in the past and isn't so unusual. Investor are skittish as a result of a growing number of macro headwinds, from uncertainty surrounding trade talks, to Brexit and Italian budget negotiations, Fed rate path and growing volatility in U.S. equity markets. Markets don't stay "easy" forever. At this stage the market needs a catalyst to turn the tide from uncertainty, either via Fed comments on the 18th or China trade. Yes, China’s announced that it is reducing higher tariffs on auto imports, renewing purchases of oil and soybean products, and discussing other measures to open up their economy, but a firm deal has yet to be struck. What’s going on is an undercurrent of 'fear' rattling about a potential recession ahead. When investors face a corrective phase in the stock market, the first thought that comes to mind is are we heading to a bear market. But, insofar as the economy is forecasted to slow down some, slower doesn't does not necessarily mean recession. Recall, economic recessions are tied to bear markets, but we would also need the 2-10 year yield curve to have a prolonged inversion, the Coincident Economic Index (CEI) to fall (came in at 104.7, up from 104.5 the previous month) and Fed monetary policy tightening (involves more than rate increase - credit and money supply). Put all three indicators together and they have correctly predicted the last seven recessions with not a single false positive. To be clear, we don't have these predictors in place to signal a recession. Furthermore, estimated earnings growth rate for the S&P 500 is 12.8%. If 12.8% is the actual growth rate for the quarter, it will mark the fifth straight quarter of double-digit earnings growth for the index. On the S&P 500 valuation front, forward 12-month P/E ratio is 15.1. This P/E ratio is below the 5-year average of 16.4, but above the 10-year average (14.6). Hence, it looks like from the pundit standpoint that it is a no-win situation for anyone that isn't selling yet. The market corrects, and a bear market is coming. The market continues to advance and the bubble will burst, ushering in the next bear market. The reality is the market behavior is divergent from the positive economic trends. Also, nobody is an Oracle for how Mr. Market will behave in the future. We have tools, run probability scenarios given the data driven analysis and then make educated estimates - but there is no crystal ball. This is why we emphasize that the understanding of risks embedded in a portfolio is central to providing value to our clients. It is our philosophy to build diverse, multi-asset portfolios in an effort to capture long-term positive returns while having resilient portfolios that may help weather future volatility. These principles are guided by the importance of portfolio diversification, maintaining reasonable expectations and avoiding the latest fads.

-December 7, 2018 Weekly Capital Market Update. For the week, a “risk off” sentiment prevailed pulling U.S. equities into a nosedive: the Nasdaq lost -4.93%, S&P 500® Index fell -4.60% and the Dow Jones Industrial Average dropped -4.50%. The only change in this growing wall of worry from what we highlighted in the December 4th note (below) was the arrest of a leading China tech executive (Huawei), thereby elevating US-China trade tensions. Yes, wage and job growth were slightly off from expectations, but this could bode well for a more dovish stance by the Fed. Regardless, all these new developments simply add additional doubt and worry to the already China trade and growth concerns. Other considerations is that the Fed has been incrementally withdrawing its QE accommodation while stocks are now yielding significantly less than short-term bonds; two-year Treasuries are yielding 2.8% while the S&P 500 is yielding just 1.9%. Yields better than bonds had been an incentive for investors to put money in stocks for years and that inventive is disappearing. Final thought is the global sell-off does have a silver lining and that’s bringing valuations back down to earth, which may wind up restoring some discipline to the equity and credit market.

-U.S. Equity Markets Nosedive, Special Capital Market Update December 4, 2018. Today, the Dow Jones dropped -3.1% and the S&P 500 fell -3.2%. But, for perspective, this has been a year of volatility with the Dow Jones falling over 600 points seven times (7x) this year. The primary diver of today’s negative market volatility was the inversion of the yield curve, where the 2-year treasury yield moved higher than the 5-year treasury yield. A negative curve, where the return to investors on shorter-dated securities is above that on longer-term bonds, has predicted all nine U.S. recessions since 1955. However, the actual gauge for a yield inversion is different than what occurred today, as the benchmark for an inversion is the 2-and-10-year treasury yield spread (not the 2-and-5 year). Incidentally, the government agency yields spreads didn’t invert and you would need a sustainable 4-weeks inversion for it to count. In our view what is happening is more of flattening of yield curve and a flat yield curve does not necessarily bring a lower stock market as proved in periods of the 1990s, 2000s and 2010s. We also believe the Fed is artificially suppressing long term interest rates. Case in point, there are more than $2 trillion of U.S. Treasury notes that are not circulating and are held by an entity (The Fed) that has a policy of not selling them. That's a huge externality in the market and is a major factor keeping long-term interest rates lower, as the Fed has a bias toward holding longer-dated bonds. We think the markets are simply reacting and pricing uncertainty with the Fed and prospects of trade progress with China – both of which will directly impact future GDP growth. While there is skepticism over successful trade discussion with China, it is our opinion there are really 3 things the market is now focused on: 1) Fed hawkish rate hike pathway (lessor fear), 2) China tariff deal (lessor fear) and 3) 2019 global & U.S. growth (this is the bigger & most recent concern). Nobody really knows what next year will bring, but consumer and business confidence are high, employment is strong, and GDP is unimpaired. Yes, there are pockets of weakness in real estate and construction, but GDP Economic growth is expected to be around 3 percent in 2019; people forget that for eight years we averaged 1.8 percent. The point is that 3 percent GDP for all intents in purposes is healthy. In vignette, we think much of today’s negative market volatility to reflect jittery investors reaction to growing uncertainty about the direction of future GDP growth, which is interrelated with the Fed and China trade. We don't believe this to be about an imminent recession, which is a harbinger of future bear markets. In fact, we believe there is reasonable chance that a Santa Claus market rally may reassert itself. For our client portfolios, should gains approach highs reached earlier this year (9-to-11% gain range), then we will look to start taking some risk off portfolios (at that time) with incrementally phased rebalancing toward more conservative holdings.

-December 1, 2018 Weekly Capital Market Update. After a tough early session on the week where the markets continued to be walloped by what was perceived as a more hawkish Fed and frustration over U.S. trade advancements with China, more sanguine news entered the picture bringing resurgence to the equity markets in the last days: Nasdaq led (+5.64%) as technology stocks rebounded, the DJIA jumped +5.15% and the S&P 500® Index rose +4.83%. In fact, the leading U.S. equity indexes all finished in the black on the week after Federal Reserve Chairman Jerome Powell said interest rates are “just below” the so-called neutral range, softening previous comments that seemed to suggest a greater distance; this spurred speculation that central bankers are increasingly open to pausing their series of hikes next year. Further, at the G20 meeting the new North American Trade Agreement was signed, but the real focus is on U.S.-China trade progress. China’s vice minister of commerce said he hopes “both sides can work together on the basis of mutual respect, balance, honesty, and mutual benefit and finally find a solution to solve the problem.” Kudlow, Trump’s top Economic Advisor, told reporters that the President believes there is “a good possibility that a deal can be made and that he is open to that.” The market reality is should the Fed continue to show transparency toward "easing" their previous aggressive stance on rates, and should China-U.S. show some meaningful trade results from the G20, then this should fuel the markets upward.

Monthly Stock Market Summary & Weekly S&P 500 Update Nov 2018

11/2/2018

-November 23, 2018 Weekly Capital Market Update. For the week, the major indexes all dropped more than -3 percent. They also had their biggest loss for a Thanksgiving week since 2011. Overall, the S&P 500 has experienced roughly an 11+% decline in a little over a month; this is similar to what developed in February and March. Stocks are under pressure for many reasons, ranging from projected earnings deceleration for 2019, China trade relations, the slump in oil (down 32%), etc. but there is another way to look at this market correction. Back in August 2018, the S&P 500 was up over +7%, or +$1.2 trillion in gains for the year, but over half of that return was solely attributed to the large Tech darlings called the “FAANG”s (FB, AAPL, AMXN, NFLX & GOOGL). These same Tech leaders also accounted for about 40% of S&P 500’s +19% total return last year. However, the astounding jet-fueled returns of the FAANGs and their impact on the leading broad U.S. equity index was simply unsustainable – after all, there are 10 other sectors in the S&P 500. Now with the FAANGs being abandoned in the wake of more than $1 trillion loss in market value – plunging more than -20% - we see that this is taking much of the tech sector with it. Yet underlying these trends is a recalibration of investment flows to stable, income play that we prefer as advisors. For example, consumer stocks are up +3.7%, utilities are +6.4% and healthcare +9.9% for the year. Investors are now seeking safety in companies that offer stable income and high dividends. The subtle message is that this looks like a "reshuffling" form of retrenchment, suggesting the business cycle slowdown concerns might be premature. The indices are telling us to stay firm, because we haven't seen any evidence of a situation like we did in 2000 or 2008. That said, we emphasize that the understanding of risks embedded in a portfolio is central to providing value to our clients and therefore our client portfolios include asset classes that react differently to different economic environments, with a diverse mix of holdings to help insulate portfolios from unexpected market events. Asset classes should be distinct, clearly defined and offer specific benefits to portfolios. We apply different types of investment classes, each playing a specific role: longer-term return performers, shorter-term risk reducers, hybrid investments (which may have a combination of both return generators and risk reducers), and diversifying alternative strategies.

-November 20, 2018 Capital Market Insights To Market Correction: We continue to maintain a cautious approach with diverse asset classes to manage risk. We subscribe to managing dynamic factor exposures while still delivering broadly diversified, economically representative portfolios. Given the diversity of our strategies, the far majority of our client portfolio loss exposure to the recent capital market retrenchment has been muted by our active management of risk, with about 0.40%-0.60% correlation. The equity market sell-off from last week has continued through Tuesday of this week with the S&P 500 and Dow Jones yearly gains now evaporated. Insofar as we have thought that many asset classes are priced on the high-side of fair, while others like tech leaders in the S&P 500 have been overvalued, our greatest concern continues to be on how the market will react to earnings deceleration in 2019. Thus, we think the financial media hype that this sell-off is more about energy doldrum (oil slumping), China and the Fed to be a couple degrees off target. Let’s revisit the math – if the S&P 500 earnings has been growing at +20% range for the quarterly basis and the forecast for 2019 is around +10%, then for all intents and purposes year-over-year quarterly growth is going to dramatically slow in 2019. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by GDP. However, we are in the camp that a +10% range growth in corporate earnings to be indicative of an overall healthy economic environment, and even a growth rate higher than the long-term norm. Thus, at this point, we will maintain our current portfolio risk posture and only look to make a more defensive change should there be new catalysts for concern. The fact is unemployment remains at 50 year lows, corporate earnings remain robust, consumer spending is powered-up, corporate stock buybacks add stock price support & capital investment is elevated. Looking at events from a historical basis, we don’t have the same excesses of past bear markets —especially in terms of leverage in investment products and the financial sector—that produced the global financial crisis in 2007 and 2008. Thus, we don’t see a replay of the 1930s or 2007 and 2008 at this time.

-November 16, 2018 Weekly Capital Market Update. All of the major indices fell for the week, the S&P 500® Index (-1.61%), the Dow Jones Industrial Average (-2.22%) and the Nasdaq (-2.15%). The U.S. equity markets were negatively impacted by some business hiccups of Tech leaders like Facebook (FB) and Apple (AAPL), along with other macro worries - falling oil prices, EU issues (Italy budget & Brexit), Fed rate increases & still some unresolved concerns with tariffs. One of the superior “directional” indicators of stock market performance is found in bonds because they trade based on fundamentals. In particular, high-yield bonds tend to be strong leading indicators of stock performance and that sector looks to be in good shape, with the treasury-to-junk bond spread holding steady. Also this week, two investment firms came out with updated market forecasts: 1) “While some incremental caution is likely warranted in 2019, our view is that portfolios should maintain a modestly pro-risk tilt,” the Charlie Himmelberg, chief markets economist and head of global markets research at Goldman Sachs and 2) Bank of America Merrill Lynch: "We believe that the holiday rally is underway." says their report. "October is known for sharp market declines, but also known for creating market lows that lift stocks into a year-end rally," they observe, adding, "Importantly, we believe the long-term trend in equity markets is higher."

-November 9, 2018 Weekly Capital Market Update. The major equity indices were positive for the week with the S&P 500 +2.13%, Dow Jones +2.84% and the Nasdaq +0.68%; investors were sanguine that legislative gridlock (via divided Congress) will provide a check on the Trump administration. Post-midterm results returned investor focus back to the home front where 78% of S&P 500 companies have beat EPS estimates for Q3 to date, marking the 2nd highest percentage since Factset began tracking this data back in 2008. Further, Factset’s data also indicates that fewer S&P 500 companies have discussed "tariffs" on earnings calls for Q3 relative to Q2, indicating that the economic impact of trade tensions could be overblown. Earnings growth expectations, however, are less robust as we look outward to 2019 where the EPS expectation is around 10% EPS growth. Finally, minutes of the Fed’s October Meeting revealed no significant changes in policy with the Fed signaling the next rate hike to occur in the month of December.

-November 6, 2018 Market Update. The mid-term elections came in as expected with Congress mixed as the Democrats regain control of the House as the Republicans gained additional seats in the Senate. However, mid-term elections have great historical significance that bodes well for the U.S. equity markets: Since 1946 every single mid-term election left stocks higher 12 months out, or more specifically the past 18 mid-term elections yielded positive returns for the stock market. With a mixed-controlled Congress the expectation is gridlock on many issues will make it challenging for Congress to spend money (that we don’t have) and the markets tend to like that scenario. However, Maxine Waters will now be the House Banking Committee Chair and that is a bit foreboding for Wall Street.

-November 2, 2018 Weekly Capital Market Update. All major equity indexes recovered lost ground for our U.S. markets as almost all sectors posted gains for the week, except for utilities. The S&P 500® Index returned +2.42%, the Dow Jones Industrial Average gained +2.36% and the Nasdaq finished up +2.65%. The positive catalyst for the equity market upturn were strong corporate earnings, job gains and renewed prospects of resolving the US-China trade tariff dispute; Trump reportedly asked key U.S. officials to begin drafting potential terms for an agreement to halt the escalating conflict. Furthermore, some corporate CEOs announced an increase in their corporate stock buyback program to take advantage of significantly undervalued prices and this news partly contributed to the market recovery. Insofar as the U.S. economy still looks healthy and economists don't foresee any near-term recession as economic and profit growth metrics continue to show robust trends, the year-over-year comparison into Calendar year 2019 will likely show slowing of profits. That said, two large investment firms recently came out with bullish predictions – Wells Fargo calling for +12% upside from last week’s close and Goldman Sachs’ prediction that the S&P 500 will recover to 2,850 by year end, representing another significant rebound of +7% from last week’s close. In contrast, Morgan Stanley countered these views with "We think this 'rolling bear market' has already begun with peak valuations in December and peak sentiment in January." It is our view that without any indication of an imminent recession - which typical trigger bear markets - then Goldman Sachs’ prediction is the most likely scenario (+7%); with a caveat that should valuations become stretched again, investors should execute tactical allocation changes and bank some profits. There were three "other" times where the S&P 500 was up +1% in 3 consecutive trading days (Oct '11, Feb '16 & June '16) and all marked a bottom to the market corrections - let's hope this technical data point holds. The forward 12-month P/E ratio for the S&P 500 is now down to 15.5. This P/E ratio is below the 5-year average (16.4) but above the 10-year average (14.5). Next week, all eyes will carefully watch the election results for potential leadership changes in Congress.

Monthly Stock Market Summary & Weekly S&P 500 Update Oct 2018

10/6/2018

-October 26, 2018 Weekly Capital Market Update. The week was marked with volatility, furious trading and sharp stock market losses with the S&P 500 falling -3.94%, Dow Jones losing -2.97% and the dropping Nasdaq -3.87%. The broad S&P 500 market index hit "Correction" territory on Friday and is -10.5 percent below the all-time intraday high last reached Sept. 21, 2018. From a historical perspective, the average correction for the S&P 500 since World War II lasts four months and leaves equities down -13% before bottoming. In turn, bear markets losses average -30.4% and last 13 month (it takes stocks nearly 22 months on average to recover). Bear markets are technically triggered when equities fall -20% off the recent highs. The market losses were initially triggered by earnings rout in Tech darlings – such as Amazon & Google – that showed some earnings weakness. However, the stock market is also reflective of a general 'wheel of worry', including the combination of low unemployment, tariffs, a stronger dollar, rising rates and rising material costs – all which may signal that the markets have reached ‘peak earnings’. Furthermore, higher costs will dampen revenue and earnings growth going forward. Below, are the many potential drivers of this correction overhang:

-October 19, 2018 Weekly Capital Market Update. The U.S. equity markets finished the week mixed with muted returns, yet trading continued to be choppy due to geopolitical events with the presumed fatal end to a journalist at the hands of a key U.S. ally, Saudi Arabia. For the week, the Dow Jones Industrial Average and S&P 500® Index eked out modest gains of +0.41% and +0.02%, respectively as the Nasdaq dropped -0.64%. Further, Wednesday’s release of Fed minutes of the most recent committee meeting revealed disparate opinions on future interest rate increases needed to maintain a neutral position. What is clear that broader macro factors continue to overshadow the fundamentally healthy economy given about 90% of the S&P 500® companies which have so far reported earnings have exceeded analyst estimates; moreover, company commentaries reveal limited impact of tariffs (so far). The U.S. economy continues to benefit from the fastest GDP growth in four years, the most robust corporate earnings growth in seven years, business and consumer confidence metrics that remain to multi-decade highs, unemployment at a half-century low, wages increasing at their fastest pace in a decade and retail sales running at their strongest pace in seven years. U.S. Leading Economic Index rose 0.5% to 111.8 in September, a fresh record peak and a little better than forecast while the IMF projects world growth of 3.7% this year and next.

-October 12, 2018 Weekly Capital Market Update. The U.S. equity markets were rattled by turbulence this past week with the S&P 500 dropping -4.07%, the Dow Jones -4.17% and the Nasdaq -3.74%. While this was a broad-based sell off that negatively impacted all sectors in the S&P 500, from the macro standpoint the antecedent was really two-edged since the biggest drag on equities has been U.S. growth (followed by investment appetite for international risk). Indeed, the repricing of U.S. growth was an overdue gut-check predicated by the Federal Reserve instituting a restrictive period of rising rates (& less stimulus) which has historically been correlated with lower average returns for equity markets. However, the direction of Fed actions has been telegraphed for some time and while in the short-term, rising rates will also negatively impact bond prices, the longer-term outlook for bond investors may be positive due to higher yields going forward. Other drivers for market jitters relate to international trade, lower oil prices and pre-earnings announcements. For example, as we move into Q3 earnings season, tariffs are an emerging topic in earnings reports and executive commentaries.

-October 10, 2018 Market Update. After a long stretch of relative calm, the stock market suffered sharp losses over the week. Stocks had come close to big drops in the last few days, but each time they recovered some of their losses. That didn't happen today. The S&P 500 logged the longest losing streak in two years (-3.3% today), while the Nasdaq posted the biggest drop (-4.1%) for 2018; it has fallen -7.5% in just five days. Our focus at this stage is on client portfolio correlation to these negative market events and it appears our firm’s diverse strategies have helped mitigate client exposure to losses. For example, our client portfolio loss range was around -0.50% to -1.25% (depending on each client's risks/goals) which demonstrate our diversity has held against adversity. Concerns about rapidly rising interest rates have helped lead to a selloff in the stock market. The biggest driver for market instability over the last week has been interest rates, which began spurting higher following several encouraging reports on the economy. Higher rates can slow economic growth, erode corporate profits and make investors less willing to pay high prices for stocks. The Fed has raised its benchmark rate three times already this year, most recently at the end of September and the Central bank meets two more times this year; we expect one more rate hike for the year. Also, energy investors reacted to shutdowns caused by Hurricane Michael in Florida and the Gulf of Mexico. Finally, U.S. tariffs on steel, aluminum and Chinese goods are another factor that could drive up costs and force companies to lower their forecasts. Market retrenchment and volatility is nothing unusual after a string of monthly gains. We continue to closely monitor the various considerations behind market behavior. At this stage, we have not processed any information that would indicate a break toward bear market trends.

-October 5, 2018 Weekly Capital Market Update. For the week, the S&P 500 was down about -1.0% and the Dow was flat, while the Nasdaq was crushed, down -3.2% and marking its worst week since March 2018. We closely watch the stock-market 'fear gauge' which experienced its sharpest weekly surge in over 6-months; the VIX is on pace to rise 39%, or 4.7 points, to 16.82 and represents its highest level since March (though it remains below the long-term average between 19 and 20). In the U.S., Fed commentary highlighted the view that the economy remains healthy and provided guidance that future rate increases will be necessary to moderate inflation. Fed Chair Powell’s statement indicated the economy “is a long way from neutral at this point” which was interpreted by the market as a more hawkish sentiment. Consequently, the yield curve steepened as Treasuries sold off to where the 10-year U.S. Note rose 18 basis points to close at 3.23% (seven-year high). Reported unemployment fell to 3.7%, a low not seen since December 1969. While Wall Street remains mixed between bullish and slightly bearish, JPMorgan remains positive: “We still recommend investors to be overall overweight equities vs bonds. The current selloff in bonds is helping this trade cushioning the decline in equities,” JPMorgan Chase & Co.’s London office.

Monthly Stock Market Summary & Weekly S&P 500 Update Sept 2018

9/1/2018

-September 29, 2018 Weekly Capital Market Update. The S&P 500 lost -0.54%, Dow Jones Industrial Average fell -1.9%, while the Nasdaq rose +0.74% for the week. The broad S&P 500 US equity index was hurt by drops in financials and materials stocks after the Fed raised interest rates 0.25% and signaled a continued gradual path of increases. The Dow Jones Industrial Average as heightened trade tensions stoked cautiousness among investors. China cancelled upcoming high-level trade talks after the U.S. imposed its latest round of tariffs which prompted China to publish a white paper attacking the "protectionist" and "trade bullyism" practices of the U.S. administration. The U.S. and Mexico plan to release the draft of a new NAFTA agreement even though trade talks with Canada have stalled. We look for the upcoming earnings season to add positive traction to the generally favorable outlook of the global economies.

-September 21, 2018 Weekly Capital Market Update. Both the S&P 500® and Dow Jones posted record highs on Thursday as the longest bull market on record continued with both U.S. equity indexes posting positive returns for the week of +0.86% and +2.25%, respectively. In turn, the Nasdaq lost on the week with a -0.29% showing. There appears to be an undercurrent of emerging trading patterns which hint toward a rotation from the Technology sector, and defensive stocks, into cyclical stocks in the Financial, Industrial, Energy and Consumer Discretionary sectors. The market is also digested another announcement of additional trade tariff ($200 Billion on China), which generated only a muted market reaction; however, some companies indicated steps they may take to mitigate higher prices if the tariff continues. Federal Reserve officials will meet next week on September 25-26 to set monetary policy. It's widely expected that the Federal Open Market Committee will raise the federal funds target range by another 25 basis points, to 2.00-2.25%. Analysts will focus primarily on the post-meeting commentary by the four Fed governors where the market expects revised projections of growth, unemployment, and inflation (extending out to 2021). Goldman Sachs recently went on record that there is only a 36% chance of recession in the next three years, a figure below the historical average. “There has been increasing investor interest in the chance of a recession in the U.S. over the next few years … Our model paints a more benign picture”, said Goldman Sachs’ economist Jan Hatzius. It is important to be mindful that almost all bear markets on a historical basis have been preceded by early stage economic recessionary trends.

-September 14, 2018 Weekly Capital Market Update. Broad U.S. equity markets continued their upward trajectory with the S&P 500 gaining +1.16%, Dow Jones returning +0.92% and Nasdaq jumping +1.36% for the week. Economic data, including the Consumer Confidence Index, continue to support the markets with a robust reading of 100.8 for August, which was the second highest since 2004. Furthermore, another (trading) barometer for overall economic health is the S&P 500’s Transportation Index and with that up +9% YTD; from that technical indicator things also appear sanguine. Furthermore, on the job employment front, wage growth accelerated while the jobless rate is at a 50 year low. Separately, trade negotiations continue with Canada while China and the U.S. are in discussions for new rounds of trade negotiations. Politically, the U.S. mid-term elections leave party house control for Congress up in the air. Looking forward to third quarter earnings (3Q18), analysts expect companies to report earnings growth of +19.9%, partly driven by projected revenue growth of +7.5%. Finally, in a recent Fed publication of “3-month to 10-year curve” by the San Francisco region, it is notable that the expressed view is recessions typically occur a ‘year or two after the curve inverts’ (where the 3-year treasury yield moves higher than the 10-year treasury). As we stand today, there is a positive spread of 80 basis points between these two yield maturity points and therefore nothing foreboding.

-September 7, 2018 Weekly Capital Market Update. The month of September started with a rocking start bringing across-the-board equity market declines; this was in response to uncertainties related to the discord in the Trump Administration, lower oil prices and headwinds associated with China tariffs and the NAFTA negotiations with Canada. All U.S. equity market indices showed weakness for the week with the S&P 500 Index declining -1.03%, Dow Jones Industrial Average edging downward -0.19% and the Nasdaq collapsing -2.55%. Recent polls have shown strong gains for Democrats, raising the prospect that the party will take back the House and maybe even the Senate. So what would that mean for stocks? Well, the historical picture is mixed. Overall, stocks typically have a tough September heading into the November midterms. However, immediately before and after the election, markets are relatively unaffected, no matter the outcome. Generally speaking, from the beginning of October until the end of the year (in a midterm year), stocks rally strongly. Looking at the heated and divisive political situation today, it is in an investor's best interest to understand that insofar as ongoing Trump turmoil may increase market volatility (at times), it is important to keep focused on what has been driving the market trends over time: Fed policy, availability of credit, economic growth, and robust earnings. LPL Research has assembled a recession watch indicator that shows low risk for a recession in the next year, while ISM Manufacturing index rolled in at 61.3 versus the estimate of 57.5. Moreover, comments from the business leader panel reflect continued expanding business strength. Looking ahead to Q3 2018, the estimated earnings growth rate for the S&P 500 is 20%. If 20% is the actual growth rate for the quarter, it will mark the third highest earnings growth since Q3 2010 (34.1%).

-September 1, 2018 Weekly Capital Market Update. U.S. equities markets accelerated their upward path with the S&P 500 +0.93%, Dow Jones +0.68% and the Nasdaq +2.06% for the week. The uptrend remains in place with all sectors participating in a broad, across-the-board rally with five positive months in a row for the S&P 500; this potentially signals further strength lies ahead. Major contributing factors to the positive equity market trajectory included solid earnings, economic reports, and commentary by Federal Reserve Chairman Powell, which reinforced the expectation of gradual interest rate increases. Furthermore, positive trade alliance developments were accomplished with the U.S. and Mexico. Elsewhere, the U.S has not reached an agreement with Canada and the European Union as President Trump appears ready to move forward on the proposed $200 billion in tariffs on Chinese imports next week. Also, investors will closely monitor the upcoming mid-term elections, and the potential shift in party control of Congress - any shift of party control has the potential to increase market volatility.

Monthly Stock Market Summary & Weekly S&P 500 Update Aug 2018

8/5/2018

-August 24, 2018 Weekly Capital Market Update. The U.S. equity market rallied for the seventh time in eight weeks on strong 2nd quarter earnings results from retailers and higher oil prices. Despite the negative headlines surrounding President Trump’s former confidants, the broad equity market (S&P 500) rose +0.88%, Dow Jones Industrial Average finished +0.51% and the Nasdaq composite surged +1.66%. The best performing sectors were energy and consumer discretionary. Overall, August has been a relatively quiet month with low trading volumes still moving the indices higher. Federal Reserve Chairman Powell indicated that with continued strong economic growth, the Fed would continue its policy of gradual interest rate increases. Trade discussions with NAFTA and China continued but with no significant progress reported. With the overall positive equity market gains banked on the week, we are perplexed why the U.S. equity market has largely shrugged the negative political implications of Trump’s cohorts making immunity deals, including one criminal court case going against Trump’s former campaign chairman. Indeed, the media and press has turned feverish on coverage of potential impeachment implications; as advisors, we must evaluate these new developments and address certain clients that have elevated fears. While no one can be sure what will ultimately transpire, we turn to history for guidance and this suggests it would have little immediate impact on the market. In the two previous cases in recent memory—Nixon and Clinton—the market behaved differently, perpetually falling in the 12 months prior to Nixon’s impeachment, and rising before Clinton’s. The proper benchmark, however, is the Nixon era which had 12 months of loses prior to impeachment. The lesson learned is that such a prolonged loss period should still provide ample opportunity to shift portfolio asset classes to risk-off given it was not a dramatic jolt downward.

-August 17, 2018 Weekly Capital Market Update. Though a topsy-turvy week with Turkey’s currency devaluation and mixed corporate earnings results for the tail end of the season, the S&P 500 eked out a positive finish of +0.66%; however, the Nasdaq lost some ground on the week, -0.29%. The stock market continues to be in a tug-of-war between policy risks vs. strengthening economic and corporate fundamentals. However, from the Macro standpoint, valuation tailwinds remain and these include: 1) 4.1% GDP for 2Q18, 2) 40+ year low unemployment, 3) 20%+ US corporate earnings growth in the 1H18, 4) continued visible benefits from lower corporate taxes, 5) uptick in manufacturing trends and 6) supportive lending environment. Furthermore, the U.S. economy remains the beacon of innovation. Consider that the U.S. gross domestic product was approximately $1 trillion in 1930 and was more than $17 trillion at the end of 2017. That’s growth of 17x. Meanwhile, the U.S. population has grown less than 3x during that time span, to 320 million people from 120 million.

-August 10, 2018 Weekly Capital Market Update. The S&P 500® Index and the Dow Jones Industrial Average lost -0.25% and -0.59%, respectively, on the week. With no corporate headlines materially impacting markets this week and a typical time for summer vacations for market participants, trading activity was the lightest all year. The markets sold off on Friday in reaction to concerns that Turkey could become the next Greek tragedy; the lira declined as much as -20% on Friday. A survey among economists projected a 3.0% GDP rate for 2018, an improvement over surveys conducted last month (+2.9%) and a year ago (+2.4%). Over 90% of the companies in the S&P have reported quarterly earnings; approximately 84% have exceeded earnings estimates.

-August 4, 2018 Weekly Capital Market Update. Sector rotation driven by reversion to the mean where the big gaining sectors of high growth names, are experiencing weight allocation reduction and that money is now moving to other areas of the market. The mainstream U.S. equity market indices edged higher: the S&P 500® Index rose 0.76%, the Dow Jones Industrial Average inched +.05% and the Nasdaq Composite partially recovered with +0.96% (following two weeks of negative returns). Trade, energy, Brexit and earnings reports dominate the news headlines. So far, 80% of the companies in the S&P 500® have reported results and earnings growth is 24% in Q2 2018, which would be the second highest earnings growth since Q3 2010. Also, global economic growth estimates for 2019 has moved up to a very healthy +3.9%. However, trade tensions continue to also dominate the headlines: the U.S. announced an increase, from 10% to 25%, of the potential trade tariffs for Chinese goods; China quickly responded with plans to place tariffs on an additional $60 billion on U.S. goods including oil and natural gas.

Food for thought: August-September months have been notoriously volatile for the stock market on a historical basis. August has been even more of a headache for investors more recently. Since 1987, the Dow Jones industrial average has posted average losses of -1.1% in August, making it the worst month for equities in the past 30 years. August is also a popular vacation month for Wall Street and therefore any related volatility is usually driven by much more narrow breadth of volume.

Monthly Stock Market Summary & Weekly S&P 500 Update July 2018

7/1/2018

-July 27, 2018 Weekly Capital Market Update. The major equity indices were mixed for the week with the S&P 500 Index gaining +0.61%, the Nasdaq up +1.06% and the Dow Jones finishing down -1.67%. With 53% of the S&P 500 companies having reported results, we are deep into the second quarter (Q2) earnings season and 73% of $SPX companies have beaten sales estimates to date for Q2 - well above the 5-year average (58%). Also, high expectations by demanding investors were reinforced for technology stocks when their intolerance for shortfalls in earnings and revenue growth caused turmoil for Facebook (losing -20% in one day); FB reported slower growth and narrower profit margins. On the trade front, the European Commission and U.S. agreed to put proposed tariffs on hold in favor of trade negotiations. Also, China and the U.S. remain at an impasse on trade. In vignette, this week showed strong GDP growth (+4.1%), sharp earnings growth (+21.3%) and preliminary steps towards easing trade conflicts which together reassured the markets. However, uncertainties related to geopolitics and the mixed results from the technology sector kept many investors sidelined.

-July 20, 2018 Weekly Capital Market Update. All the major U.S. equity market indices edged slightly upward for the week with the S&P 500 +0.02%, Nasdaq +0.15% and the Dow Jones +0.20%. Moreover, the overall S&P 500 Volatility Index (VIX) continues to smooth with volatility range trading in a tight, lower range of 11.9-13.3. According to FactSet, 77% of S&P 500 ($SPX) companies have beaten sales estimates to date for Q2, above the 5-year average (58%). Furthermore, $SPX is reporting earnings growth of 20.8% in Q2 2018, which would be the second highest earnings growth since Q3 2010. Revenue growth has been 9.0% in Q2 2018; highest revenue growth since Q3 2011. Unfortunately, trade friction continues to overshadow positive economic fundamentals with dominating headlines that perpetuate market pressures. For example, on Friday, President Trump announced his willingness to place tariffs on all $505 billion in Chinese goods imported to the U.S.

-July 13, 2018 Weekly Capital Market Update. The major U.S. equity markets followed up with another round of weekly gains: S&P 500 +1.55%, Dow Jones +2.32% and the Nasdaq +1.79%. Even in the throw of escalating global “quid pro quo” trade tariff actions, investors remain skeptical of an all-out trade war. Indeed, while the U.S. announced an additional $200 billion worth of tariffs on Chinese goods in late August, both the U.S. and China signaled that they were open to resuming trade negotiations. For instance, China is increasingly unlikely to retaliate with additional tariffs since the goods imported from the U.S. for additional tariffs is becoming more finite, thereby mitigating these tariff options for China. That said, China could weaponize its $1.2 trillion in U.S. treasuries as another form of negation. A few banks released 2nd quarter earnings and JP Morgan’s Chairman James Dimon indicated that the U.S. economy is charging ahead on most fronts, and the tariff disputes are “affecting psyches more than economics.”

-July 6, 2018 Weekly Capital Market Update. The S&P 500 gained +0.78%, the Dow Jones returned +0.62% and the Nasdaq finished up +1.10% on the week. This week’s S&P 500 gains represent almost one-third of its total return for the year, while the Dow continues to underperform; the Dow remains in negative territory for the year as companies in this industrial index are expected to disproportionally shoulder more of the fallout from tariffs. Given this escalating global tariff environment we continue to favor technology services and small caps stocks, of which both have relatively low exposure to trade friction. For example, trade continues to dominate the headlines as the U.S. imposed tariffs on $34 billion in Chinese exports; China immediately reciprocated on an equal value of American goods, principally agricultural staples and vehicles. Given the current investment climate, we also remain comfortable with a number of our alternative strategy mutual funds, such as YCG Enhanced (YCGEX, +6.0%) and Janus Henderson US Managed Volatility (JRSTX, +7.4%) - both of which have enhanced returns related to volatility. Next week we have earnings season kicking off with some financial names (WFC, JPM & C), which are expected to have positive releases. Friday’s jobs report showed a larger-than-expected gain of +213,000 jobs in June with unemployment rising from 3.8% to 4%; the workforce grew by +601,000 jobs. However, economic fundamentals continue to be overshadowed by trade war rattling.

Monthly Stock Market Summary & Weekly S&P 500 Update June 2018

6/1/2018

-June 29, 2018 Weekly Capital Market Update. The major U.S. indices continued to decline this week as trade and other geopolitical headlines dominated investor sentiment. For the week, the S&P 500® Index fell -1.33%, the Dow Jones Industrial Index’s lost -1.26% and the Nasdaq Composite’s experienced the sharpest decline of -2.37%. Clearly, with the market narrative being dominated by developments in the ongoing trade-negotiations (next week deadline of July 6), any corporate fundamental and economic headlines remain in the backdrop. Also, foreign markets have been breaking down, and lack of positive response to trade negotiations could send markets lower. The strongest predictor of recession is the inversion of the yield curve. While it hasn’t really inverted from the very long end to short, the yield curve is flattening.. Why? One factor is the Fed’s bullish outlook on the economy which is engendering hawkish views on rates. The others are very weak inflation expectations over the long term as well as large demand for even modest long end yields (also, U.S. gov’t buyback of long-end).

-June 25, 2018. We are pleased to announce that this year has brought yet another accolade of recognition with the Wealth & Money Management Award for Best Wealth Management Practice 2018 in Southern California. The official announcement of this recent award included the following: "The 2018 Wealth & Money Management Awards continues to be dedicated to celebrating the hard work, and dedication, of those working in this integral industry from asset managers, financial planners, HNWI services and specialist banking providers to name but a few. Financial management is an arduous and complicated task; therefore, many individuals, business people and families look for support to guide them through the complex process of managing their money. From ensuring tax compliance, to assisting clients through monumental life changes, those working in the wealth management industry often become much more than just advisors, developing strong relationships with clients as they navigate many of life’s challenges together."

-June 22, 2018 Weekly Capital Market Update. The broad US equity market indexes declined on the week amidst ongoing concerns of a global trade war with S&P 500 -0.87%, the Dow Jones -2.03% and the Nasdaq -0.69%. This week’s Trump policy threats were directed at almost $450 billion tariffs on US imports from China (equates to value of total imports in 2017) and 20% levy on EU auto imports. In turn, both regions responded with retaliatory counter-tariff intentions, while China also indicated more hawkish regulations on local operating US companies. With all the smoke of trade wars brewing (no fire yet) it is no wonder why the positive fundamentals in the US economy are being discarded by the capital markets. For example, S&P 500 $SPX is projected to report earnings growth of 19.0% in Q2 2018, which would be the 2nd highest earnings growth since Q1 2011 (graph below). We have written extensively about the economic drag on the global economy (see March 3 Tariff Viewpoint: http://www.mcapitalmgt.com/blog/archives/03-2018). These miscued US policies would have severe ramification on future corporate earnings. Case in point, Materials and Industrials stocks, which could be significantly affected by a global trade war, sharply underperformed on the week. Nonetheless, a “trade war” tipping the global economy into a recession still remains a low probability given world trade has almost tripled since 1996 & the trade war escalation still remains in the threat phase (perhaps simply a negotiation tool by Trump).

-June 15, 2018 Weekly Capital Market Update. Markets were mixed this week as fed policy changes, macroeconomic and geopolitical developments continued to dominate headlines. The Federal Reserve raised interest rate +0.25%, moving the short-term rates to 2.0%; the US central bank also provided hawkish statements about perhaps two more rate hikes ahead in 2018. The S&P 500 closed +0.38%, the Down Jones -0.58% and the Nasdaq +1.46%. Fundamentally, the US is still benefiting from strong economic underpinnings. For example, small business optimism rose to its second highest level in the report’s 45-year history and retail sales surged in May. There was also some big news this week on a dividend darling with the $85 billion AT&T and Time Warner merger winning antitrust approval.

-June 8, 2018 Weekly Capital Market Update. With improved investor sentiment all major U.S. Equity Indexes rallied on the week: S&P 500 +2.76%, the Dow Jones +3.74% and the Nasdaq +2.73%. Indeed, every sector posted gains with the exception of the staid yield play of Utilities. While domestic stock strength has returned, emerging markets continue to be walloped (-4.34% week, -13.38% YTD) due to U.S. interest rates, the rising dollar and continued trade tension. The U.S. Corporate Bond Index also has a negative total return of -3.1% for the year, with the long bond’s total return being a woeful -5.4%. This bond rout is largely related to the expectation of several more rate hikes by the Federal Reserve which theoretically would reward investors to wait to invest in higher yielding securities down the road.

June 1, 2018. Monthly Stock Market Returns & Recap for the Month of May 2018: Though it was a wild ride, all major markets finished positive on the month with the S&P 500 +2.41%, Dow Jones +1.41% and Nasdaq +5.61%. There were several positive underpinnings behind the month's uptick in equities, including: 1) upwardly revised GDP growth to 3%, 2) unemployment dropping to 3.9%, 3) business outlook survey suggesting a pickup in manufacturing sector growth (ISA moved to 58.7), and 4) higher construction spending. Furthermore, corporate capital spending (capex) has increased almost +9% since the presidential election (Q4/16) as a result of pro-business policies and the need to expand capacity. Finally, some of the popular, highly-valued tech leaders recovered during the month which, in turn, boosted the S&P 500 and Nasdaq. Morgan Stanley put out a statement this week calling George Soros’ warning of a financial crisis “ridiculous”. Morgan Stanley CEO James Gorman said while some of Soros’ concerns are warranted, others are not. For instance, Gorman said about Soros’ view of the EU that “I don’t think we are facing an existential threat at all”.

Monthly Stock Market Summary & Weekly S&P 500 Update May 2018

5/1/2018

-May 29, 2018 Weekly Capital Market Update. The CBOE Volatility Index (Ticker: VIX) or “Fear Index” spiked 29% today on geopolitical news of escalating concerns over Italy's political party coalitions which, in turn, jittered Italian bank stocks and bonds along with other EU country markets. With most overseas markets closing in the red, our U.S. markets likewise opened and subsequently closed with losses on the day. Emerging market bonds also took it on the chin for the day, while flight to quality drove the US Dollar (USD) and treasuries upward. Leaders of the far-right League and anti-establishment Five Star Movement in Italy failed to form a coalition government over the weekend and these concerns around support for populist parties gaining traction ahead of new elections has resulted in risk-off market sentiment. It is our view that while Italy's economic problems are far more severe than the political issues these are really not new developments - they have been known and priced into the markets. Indeed, Italy has been a sore spot in the EU for years and there have been a number of occasions in the past where fears of Italy splitting from the EU have surfaced – much like Greece. Yet, in the intermediate and longer-term, it has turned about to be ‘much ado about nothing.’

-May 25, 2018 Weekly Capital Market Update. While the third week of May imputed a degree of uncertainty by US policy makers, which in turn led to a mixed performance on the five trade days by US equity markets throughout the week, all major US market indexes nonetheless were able to eke out a positive return: S&P 500 +0.33%, Dow Jones +0.18% and Nasdaq +1.08%. The US stock market was exposed to counterweighing factors of influence with the positive development of Secretary Mnuchin announcing early in the week that the U.S. and China are “putting the trade war on hold,” then later in the week (Wed) where the Commerce Department put a NAFTA tariff bullseye on auto imports by stating that auto imports “threaten to impair the national security.” Then on Thursday, Trump again rattled the capital markets by calling off the peace summit with North Korea due to “tremendous anger and open hostility” on the side of Kim Jong Un. Also on the Macro-front, news surfaced on Friday of prospects for an increase in oil production by OPEC and Russia, which led the best performing S&P 500 sector (energy) to consolidate downward. In short, geopolitical headlines and Trump tweets once again overshadowed the constituent fundamentals of the 500 companies trading on the S&P index. What is becoming more and more evident is the less the President tweets and the less Trump goes off script with the media, the better the chances the underlying stocks in the S&P 500 have to meaningfully benefit from positive economic and corporate fundamental trends.

-May 19, 2018 Weekly Capital Market Update. All U.S. major equity indexes lost ground on the week with the S&P 500 -0.47%, Dow Jones -0.36% and Nasdaq -0.66%. Higher interest rates weighed on market sentiment, particularly in the rate sensitive areas of the market such as real estate, utilities, and telecom – all which lost over -2.5% for the week. Looking at future quarters, analysts currently project earnings growth to continue at double-digit levels through the end of 2018. For example, for Q2 2018, analysts are projecting earnings growth of 18.8% and revenue growth of 8.4%. Further, negative EPS guidance is 57% (51 out of 89), which is well below the 5-year average of 72% (Factset). We expect companies in the S&P 500 with higher global exposure to benefit from the tailwinds of a weaker U.S. dollar and higher global GDP growth. The forward 12-month P/E ratio is 16.4, which is only slightly above the 5-year average of 16.1. Wall Street’s consensus bottom-up target price for the S&P 500 is 3084.39, which is +14% above the closing price of 2713.

-May 11, 2018 Weekly Capital Market Update. All major U.S. equity market indexes rallied on the week with the S&P 500 +2.49%, Dow Jones +2.51% and Nasdaq +2.67%. The markets were uplifted with the easing of inflationary concerns after both the consumer price index (CPI) & producer price index (PPI) came in lower than expected. Markets were also supported by corporate earnings results where almost 80% of the S&P 500 $SPX companies have beaten EPS estimates to date for first quarter. If 78% is the final percentage for the quarter, it would be the highest rate since Factset began tracking this data in 2008. The energy sector has been particularly helpful to the S&P 500 with its continued recovery and this has been a standout supporting constituent of companies for the domestic broad market index. Case in point, since the end of March the S&P Energy sector has gained +14%. Finally, the dollar stabilized while the 10-year treasury was held below 3%. We view the month of May as pivotal since it can be a telling month. For example, since the 1970’s, the full year S&P 500 return has been green 35 out of 36 years that saw the S&P 500 up year-to-date in May. Hence, we are encouraged with volatility (VIX) trending below the normal range of 13-15 coupled with majority of the trade days posted gains for the week.

-May 4, 2018 Weekly Market Update. The week ended on a positive note for stocks marked by fluctuating index prices for the major U.S. equity indexes. However, even after the leading U.S. market indexes rallied strongly on Friday, stocks finished mixed for the week. The S&P 500 lost -0.21%, the Dow Jones down -0.19% and the Nasdaq recovered +1.26% on the week. The April jobs report was broadly positive while the unemployment rate fell to 3.9%, the lowest since December 2000. Further, the Fed inflation gauge for rate increases was adjusted toward greater flexibility with “symmetric 2 percent objective over the medium term.” The term “symmetry” suggests more dovish stance on Fed rate hike actions on the draconian 2% inflation target; hence, if inflation exceeds 2% the Fed may not act as aggressively.

-May 2, 2018 Market Research Note: The capital markets are currently struggling to reconcile two narratives of robust economic growth and fears of increasing (downside) tail risk. There are also end-of cycle worries about growth momentum facing headwinds with higher rates and simmering trade-war undercurrents. Higher inflationary mechanisms have also resurfaced (CPI, commodities, gasoline) and there appears to be bond yield backup where yields rise, prices fall. Recall, the Fed’s March Minutes: “some further firming of the stance of monetary policy as likely to be warranted” and “that it remained appropriate to follow a gradual approach to raising the target range for the federal funds rate.” Finally, investors are also still trying to process that while equity markets are a bit off their past lofty levels, we remain in a low-return environment. Hence, as the risk-free rate moves higher, even in an orderly incremental manner, then fixed income will becomes more of a competitive asset class at some point. As for client portfolios, we will continue to implement changes to reflect all these considerations and discuss the rationale for new recommendations during our client meetings.

-Going forward, we will continue to provide capital market insights but reserve some of our more proprietary recommendations and opinions to the form of exclusive communications with our clients. More specifically, this would pertain to recommended portfolio construction changes based on new developing fundamental, economic, corporate and political considerations.

Monthly Stock Market Summary & Weekly S&P 500 Update April 2018

4/1/2018

-April 27, 2018 Weekly Market Update. Major U.S. market equity indexes traded largely flat to slightly down for the week while the economy notched another quarter of growth for the first quarter, growing +2.3% at a quarter-over-quarter annualized rate (beating the 2.0% estimates). The U.S. economy has grown at a healthy +2.9% clip year-over-year. Yet, the S&P 500 showed no traction for the week by ending flat, while the Dow Jones and Nasdaq lost -1.03% and -0.37%, respectively. Not even strong S&P 500 corporate earnings that have exceeded 20% has been a sufficient enough catalyst to reset the bull market trend. This level of earnings growth is a remarkable achievement during a period where many are calling for a bear market. Indeed, these factual positive fundamentals are antithetical to Bloomberg’s call of a bear market based on “People who expect the stock market to fall over the next year now outnumber people who predict the opposite.” So far for the first quarter, 79% of S&P 500 companies have beaten EPS estimates to date. If 79% is the final percentage for the quarter, it will mark the highest percentage since we began tracking this data in 2008. Technology leaders Facebook, Amazon, Alphabet and Microsoft also all reported significant revenue for the week.

-April 25, 2018 Market Research Note. The yield on the 10-year Treasury note, which helps set rates for auto loans, mortgages and other lending, climbed to 3 percent for the first time since 2014. Some strategists have predicted the 3 percent 10-year yield represents the end of the stock market rally, with corporate borrowing costs becoming too punitive and fixed-income looking too appealing. The view is higher rates would be a drag on the economy and therefore a harbinger for both economic woes and stock market upheaval. The corollary to this theory is higher rates are bad for stocks period? To the contrary, since the early '60s we've seen periods of higher rates 23 times and the S&P 500 was higher 19 of those times (Refer chart below). It is also our view we are in a market environment of higher growth and higher interest rates - while these early stage conditions are often supportive to equity valuations - these two factors are also often associated with more market volatility. Again, investors (& their advisors) should take this opportunity to review asset allocations relative to age, goals, and tolerance for risk and volatility.

-April 20, 2018 Weekly Market Update. The U.S. equity market barely nudged through to its second consecutive weekly gain, with the S&P 500 Index ($SPX) rising +0.26% and a +0.45% year-to-date total return. Strong corporate earnings growth of 18.3% for the first quarter helped alleviate the sharp market jitters; also, so far this has been the highest earnings growth since Q1 2011 (19.5%). Further, $SPX is reporting a net profit margin of 11.1% for Q1, the highest net profit margin for the index since FactSet began tracking this data in 2008. Thus far, 85 companies in the $SPX have reported results and of these, about 70% have met or exceeded analysts’ sales estimates and 87% have met or exceeded analysts’ earnings per share (EPS) estimates. Despite slightly higher equity prices, there has been a cautious tone to the market over geopolitical headwinds and domestic political uncertainty. We are hopeful that next week's reported earnings for over 170 companies in the S&P 500 Index will finally establish some positive tailwind based on solid fundamentals. Indeed, company first quarter earnings results for next week include: Verizon, Lockheed Martin, Visa, United Parcel Services, Starbucks, ExxonMobil, Alphabet (parent company of Google), Facebook, Amazon, Microsoft, Intel, among others.

-April 13, 2018 Weekly Market Update. The U.S. equity markets recovered some ground this week with the S&P 500, Dow Jones & Nasdaq returning +2.04%, +1.80% and +2.77%, respectively, on positive trade statements by China, Facebook CEO Zuckerberg’s well-handled congressional testimony and positive corporate earnings developments. Case in point, China’s Xi Jinping showed promising strides in trade while 70% of S&P 500 ($SPX) companies have beaten EPS estimates to date for first quarter - equal to the 5-year average. Additionally, 73% of $SPX companies have beaten sales estimates to date for Q1, well above the 5-year average (57%). [Earnings source: Factset]

-April 7, 2018 Weekly Market Update. It was a wild ride for stock investors this week and I can say from my own experience as a professional investment advisor, the client calls and emails finally spiked during this week. However, given the broad market index (S&P 500) ups and downs – many of which moved into the black and red multiple times on certain days – investors might be surprised to learn that the CBOE Volatility Index (VIX) was not that far out of line with long-term trends. Indeed, the VIX (aka fear index) long-term average is 20, but during this week’s market swings the VIX only really traded between 19-25 - closing at 21.5 for the week. What also might be surprising to investors is that with two of the week's daily loses being greater than -2.0% for the S&P 500 (including Friday), the domestic broad market index only lost -1.3% for the week. Unfortunately, economic and corporate fundamentals were overshadowed by disruptive trade tariff policies [Refer to our March 3, 2018 Trump Tariff Viewpoint]. It is our view that Trump is likely using the new $100 billion of China Tariffs as a negotiation tool, as echoed by his chief economic advisor Kudlow. Regardless, there remains at least another month-and-half before any decision is made either way, including a period of CEO comments and consultation. Another mitigating circumstance is that the US is no longer a manufacturing country with about 80% of GDP tilted toward service industries. Yet, there is still a lot at stake politically with the mid-term House of Representative elections where the Republicans need every vote. Trump can ill-afford a brewing trade war that could cause economic headwinds and continued capital market unrest. Further, it is not lost on Trump that China happens to also hold about $1.17 trillion in American treasuries. Turning back to the equity markets, seven of the eight largest global companies by market capitalization come from the tech sector, and we continue to view their continued outperformance as unsustainable. Hence, other factors beyond trade war rattling is in play here. For example, the FAANGs and other emerging tech stock leaders have their own unique operational challenges that have surfaced and this just happens to be coinciding with macro global trade joisting. On the positive side, we are moving into first quarter earnings and this should be a bright spot for stocks in the news cycle. Another consideration is stock dividends have registered a +9% increase in the first quarter and it is estimated after we close second quarter of 2018, dividend payout would have reach $400 billion, with a large part expected to be reinvested in the market; thus, there is some degree of support mechanism in place.

-April 3, 2018 Market Update. This equity market research note is released before the market open today and futures have been up in the +0.60%-0.80% range. We reiterate that volatility typically extends for several months after the initial market correction (Feb 9th) and there is nothing unusual about this current cycle. The S&P 500 hit correction territory again yesterday when it tested the 2,556 level at 2:40pm EST; it also broke through -3% level loss. However, this consolidation phase of retesting the Feb 9th correction level demonstrated that there remains enough buyer interest at this market support range to drive a partial market recovery from the lows (S&P 500 finished the day at -2.23%). There are competing factors in play including: the market is correcting frothy valuations and is still processing a change to higher economic growth together with higher interest rates. Also, investor feverish sentiment toward stocks like the FAANGs - and other similar new tech like Tesla and Nvidia – had priced values to perfection in market segments that are not immune to challenges. Of course, Trump tariffs and trade war talk has only added more controversy and uncertainty in the equation – two ingredients abhorred by market bulls. From another perspective the market does great when information is being processed about higher company earnings, lower corporate taxes, higher economic GDP and infrastructure investment. Now that the discussion is about trade wars, regulations in social media, higher interest rates impact on the economy, flattening of the yield curve – then, that narrative has imputed caution back into play. We remind investors that timing the market in or out is not a strategy, nor is panicking. Also, while no one knows how long these markets will behave badly, we suggest investors (& their advisors) to use this volatility for buying opportunities and/or rebalancing allocations back in line with the long-term risk/return tolerance targets.

-April 2, 2018 Market Update. At least richly priced and overvalued equities are no longer the banner being waved by market bears as the elevated forward looking price-earnings ratio ("P/E") for the S&P 500 has sharply dropped from above 18x, to 16.1x today. This P/E coincidentally is the same P/E of the five-year average (also 16.1). Additionally, the estimated S&P 500 earnings growth rate for the first quarter 2018 is 17.3% and should this rate materialize, then this would mark the highest earnings growth since Q1 2011 [Source: FactSet]. What has driven the increase in the bottom-up EPS estimate for Q1 2018 and the entire year of 2018? The decrease in the corporate tax rate for 2018 due to the new tax law is clearly a significant factor in the upward revisions to EPS estimates. However, inasmuch as there has yet to be a sign that volatility has abetted history has proved that patient investors are rewarded with the best investment opportunities during bull markets that are afflicted with a market correction.

-April 1, 2018 Market Update. To the chagrin of most U.S. investors their quarterly broker statements will likely show the first loss since 2015 given both equities and bonds lost ground year-to-date. In fact, almost all investment asset classes struggled through a turbulent and volatile quarter in the capital markets. For example, the broad S&P 500 stock index fell -1.2% in the first quarter of 2018, snapping a nine-quarter stretch of gains. And, it wasn’t just domestic equities that took lumps during the quarter, as MSCI Europe also lost -2.0%, US Corporate Bond Index -2.2%, Bloomberg Aggregate Municipal Bond Index -1.1%, U.S. Intermediate Government Bond Index -1.7% and Ishares 3-7 year treasury -2.3%. Even silver and natural gas lost -4.8% and -7.4%, respectively. The most pain however was inflicted to those income-driven investors chasing high yield in master limited partnerships (MLPs) and for those investors that were naïve enough to have high weightings in MLPs probably experienced losses of around -9% for that asset class. Conversely, for those investors exposed to diverse multi asset portfolios - as employed in most of our clients' holdings - the ride should have been less wild and the losses more muted. For example, Pimco All Asset Fund eked out a gain, while certain alternative funds (like CPLSX +1.76%, JRSTX +1.57%, YCGEX +2.01%) all showed gains. Also, the preferred share holdings were largely flat and our largest bond holding of PONAX lost only -0.32%. Most of our individual client stock allocations have high exposure to defensive industries with higher yields and therefore have greater moat protection during volatile periods. For instance, industries like telecom, consumer staples and banks were also in the black so far this year. Going forward, we look for the first quarter earnings to start in this upcoming week of April and we expect positive double-digit growth; this highly visible and measurable source of positive data should help alleviate part of the market jitters associated with February and March (however, it will take a couple weeks before there are enough S&P companies reporting to have a consensus upward trend).

Monthly Stock Market Summary & Weekly S&P 500 Update March 2018

3/1/2018

-March 30, 2018 Weekly Market Update. Markets are closed today in observance of Good Friday. It was a volatile week in the capital markets, but Thursday’s strong finish essentially was a day of recovery where all major equity indices moved back to break-even or in the black for the week. However, the S&P 500 Index still lost -2.7% for the month of March, which follows February’s -3.9% pullback; these were the first consecutive monthly declines in the broad equity Index since October 2016. As clarified in the many equity blog comments this week, the market rout originated from the sharp losses by popular (mainstream) technology names like Facebook, Twitter, Amazon, Netflix, Google, etc. However, investors can still find order in disorder by taking a broader perspective. Indeed, it should come to no surprise the hot hand in tech favorites were exposed to some degree of reversion to the mean. For example, since 2015 the Nasdaq has returned 49.1% compared to 28.3% for the S&P 500® Index. On the economic front the IMF released another silver lining by revising up its forecast for 2018 global growth by +0.2% to 3.9%.

-March 29, 2018 Market Update. The U.S. equity markets have been unruly, largely dragged down by Tech darlings like Facebook (FB), Twitter (TWTR), Netflix (NTFX), Alphabet (GOOGL), among other past market leaders – which has rippled into other sectors and retested the market support set with February’s low when the S&P 500 hit 2,581. However, even with the spike in volatility this year the overall stock volatility is not particularly elevated relative to the last 20 years (see chart below). Indeed, recent market action is not “abnormal” over a historical longer-term perspective. The fact is any sharp market movement appears overblown relative to last year, when volatility declined to historically low levels. During these times of uncertainty investors need to have a broader perspective that strong corporate earnings are intact, GDP is growing at a healthy +2.7%, unemployment remains at a historical low and financial institutions remain sound. The synchronized global economies continue to recover while the credit market also remains a source of liquidity; the bond market does not see a major problem looming. Finally, bear markets are almost always associated with recessions. Warren Buffett (the sage of Omaha) has said, “the stock market is a device for transferring money from the impatient to the patient.” At this stage it is important to also remind investors that portfolios should embrace the diverse breadth of the investment universe – having access to an exceptionally diverse pool of investments enhances the potential for both returns and risk diversification.

-March 23, 2018 Weekly Market Update. The equity markets took a dive on the heel of proposed Trump Administration actions that could spur trade wars (new round of $60 billion tariffs on China-based exports), Facebook data breach that rippled through other social media stocks due to new regulatory concerns, a revolving door of top WH official turnover and uncertainty over the Fed Reserve in managing a growth economy with rising rates. More specifically related to the Fed, there is uneasiness in the capital markets over whether the Fed will become hawkish and hit the economic breaks too many times with Fed hikes and how these rate actions may become an albatross on the current 2.7% GDP growth trajectory. With the equity markets yet to find ground after the early February correction, these negative developments rippled through the major U.S. stock indices with the S&P 500 -5.93%, Dow -3.68% and Nasdaq -6.54% for the week. We can't emphasize enough the benefits of a diverse multi-asset portfolio during these periods of market stress. For example, our client portfolio downside correlation to these events remain in the 0.40-0.60 range - and for those more recent clients in which we have had high cash balances due to elevated valuations - we have now been able to find favorable pricing entry points into high conviction, quality securities.

-March 22, 2018 Market Update. While the U.S equity markets continue to show volatility that are not uncharacteristic for a market seeking stability after the correction in early Feb, Trump’s trade war rattling has shown itself to be an ongoing troubling market force. This wall of worry was exacerbated by Trump’s lead personal attorney resigning and reverberations from yesterday’s Facebook data breach. The result of these factors was the S&P 500 -2.52%, Dow -2.93% and Nasdaq -2.43% (YTD the S&P is -0.68%, Dow -2.56% and Nasdaq +3.81%). As advisors, we used this market upheaval period to put some cash to work in high conviction assets deemed overly-punished by widespread capitulation.

-Market 21, 2018 Market Update. The Federal Reserve moved rates +0.25% today to 1.75%, which was in line with expectations. Powell, the Fed Chair, also appeared less hawkish with an indication that the expected three rate increase for the year remains unchanged; though it was indicated that the Fed would remain open to sharper increases should the economy overheat. The Fed also increased the GDP growth rate for the year to 2.7% from 2.4%. The S&P 500 and Dow industrials both slid -0.18%, while the Nasdaq fell 0.26% for the day. The average 30-year fixed-rate is now about 4.5%, up from 4.15% on Jan. 1st and significantly higher than the record low of 3.5% back in December of 2012.

-March 19, 2018 Market Update. Over the past five (5) trading days, the S&P 500 has given back -2.48% and the Nasdaq -3.22%. During periods of volatility it is a great time to reevaluate investor risk aptitude and potentially reallocate investment holdings. However, it is also paramount that investors keep their long-term investment objectives in place and not make emotional decisions. As investment advisors we consider short-term price volatility as an opportunity and high price valuations as risk. We also emphasize that the understanding of risks embedded in a portfolio is central to providing value to our clients. We subscribe to managing dynamic factor exposures while still delivering broadly diversified, economically representative portfolios. We think of investing in terms of probabilities instead of binary outcomes and therefore we apply a selective multi-asset return approach of diversity for risk management. We also continue to educate our clients on investing and think it is important to share valuable historical perspectives on periods characterized by market stress and volatility. For example, from the beginning of the equity market correction decline, of which the -10% was reached back on February 8th of this year, the median return of the S&P 500 Index has been +3.4% after a period of six-months. However, the more telling fact is that 12 months from the beginning of the equity market correction decline the median return of the S&P 500 Index has been +13.3%. Also, these corrections were driven by changes in rates, causing overall market jitters over interest rates. (Refer to Exhibit 2, below)

-March 16, 2018 Weekly Market Update. Equity market volatility remained elevated while U.S. equity indexes lost ground for the week: S&P 500 -1.20%, Dow Jones -1.51% and Nasdaq -1.04%. Placing the ongoing market volatility into perspective, the S&P 500 has moved by more than 1% in nine (9) of the 11 weeks this year, compared with 13 such weeks for the entire year of 2017. The negative market tone was largely driven by ongoing political uncertainty of top WH job shifts including the Secretary of State and Trump’s top economic advisor. Compounding this internal upheaval was a report that surfaced suggesting the WH plans to announce a new round of tariffs aimed at up to $60 billion in annual Chinese imports (e.g., electronics, telecommunications equipment, furniture & toys) in retaliation for intellectual property theft. After Gary Cohn’s resigned from the role WH Chief Economic Advisor last week, President Trump tapped Larry Kudlow as director of the National Economic Council. Mr. Kudlow’s initial economic remarks as the new incoming advisor was a call for “phase two” of tax reform, which would make individual tax cuts permanent and lower the capital gains tax rate.

-Montecito Capital Management Group and its Founder, Kipley J. Lytel, CFA is honored to have again been ranked in the Top 20 Financial Advisors List for 2018, particularly given the depth of 898 peer advisory firms considered. According to Managing Wealth Advisor, Lytel “We continue to be impressed with the rigorous selection process employed by Expertise, which includes a three-step process that scored financial advisors on more than 25 variables across five categories, and analyzed the results to give you a hand-picked list of the best regional financial advisors in California.” Lytel also expressed that “It is rewarding to be recognized for our outstanding investment advisory services by a neutral, third-party advisor ranking entity. Indeed, the five determining factors of Reputation, Credibility, Experience, Availability & Professionalism are a ‘Best of Breed’ hallmark for California-based wealth management practices.”

-This fact about female executives speaks for itself: "Over the past seven years, S&P 500 companies where at least 25% of executives were female generated higher one-year returns on equity than the overall index, on a median basis, according to data compiled by the BofA." Moreover, according to McKinsey study: "Companies in the top quartile for gender diversity were 15% more likely to see their operating income surpass the industry median."

-March 9, 2018 Weekly Market Update. The equity markets traded down most of the week on fears of a trade war, but quickly rebounded on news that steel and aluminum tariffs would exclude imports from Canada and Mexico. The stock market's late week recovery was also aided by strong economic data punctuated by an outstanding employment report, with a whopping 313,000 new jobs reported in February. For the week, the S&P 500 returned +3.59%, the Dow Jones gained +3.34% and the Nasdaq surged +4.17%. On the earnings front, 73% of the S&P 500 ($SPX) companies beat EPS estimates for Q4, a figure that is well above the 5-year average of 69%. Since the US trade deficit continues to expand, it is our view that this provides a good pulse on the health of our U.S. economy where robust domestic demand continues to drive import activity. It’s when the trade deficit shrinks, well, that is when investors should look deeper in the trade numbers to determine if it is slowing demand or currency exchange headwinds.

-Fair trade is challenging with China and that is why a blunt object like a tariff is a crude tool for a complex problem. China is a master manipulator - case in point, as part of the membership into the World Trade Organization (WTO) China was required to reform thousands of laws, yet China failed to deliver the big items like opening telecom mkt, reform state-owned enterprises, halt manipulation of technology standards, etc. Adding salt into the wound is that since China is now part of the WTO they have abused that membership to win regulatory sanctions against US companies like Qualcomm and pushing agendas to force US tech companies to turn over user data and intellectual properties to their gov't. The US Information Technology & Innovation Foundation says our country is not pursuing "constructive confrontation" on these matters, and due to this neglect, US companies are suffering. The upside is China's currency (yuan) is currently free floating now and has surged against the USD which will be hurting their export competitiveness.

-March 3, 2018 Trump Tariff Viewpoint: Going back to 1776 Adam Smith, tariffs have had a disruption effect that hurts the many at the benefit of the few (steel industry). George Bush tried some steel tariffs briefly and while it effectuated a brief industry boost, it still didn’t work out for the steel workers in the long-run. It is not about why can others get away with it. The U.S. is the largest economy in the world and therefore there will be far more significant negative ramifications. The bigger issue is other countries will retaliate with tariffs and this will create both pricing and industry disruption when for the first time in over a decade the entire world is finally growing GDP in tandem (general economic health worldwide). Even China has been moving in the right direction - in 2015 China reduced many import tax rates for clothing, footwear, skincare products, diapers and other consumer goods to boost domestic consumption. The average reduction is more than 50 percent. The odds are that many products will be going higher for our US consumers (steel based-products like autos-airplanes-bikes, blue jeans, even beer!) and Europe has already responded with a proposed tariff against Harley Davidson, Electrolux not making the $250M cooking factory in Tennessee, etc. None of this is good and clearly is at odds with prevailing economic theory, including painful historical lessons going back to the Great Depression (Smoot-Hawley Tariff). Tariffs derail free market competition and this competition enables the consumer to reap the lowest price. Now the price of the good with the tariff has increased, the consumer is forced to either buy less of this good or less of some other good. The price increase can be considered a reduction in consumer income. Since consumers are purchasing less, domestic producers in other industries are selling less, engendering a decline in the economy (if trade ware escalates to other industries). Incidentally, our firm is on record as early as Nov 9, 2016, in a Wealth Management Magazine article where firm founder, Kipley Lytel CFA expressed concern over the potential for Trump protectionist policies engendering a trade war:
http://www.wealthmanagement.com/industry/many-advisors-smile-trump-s-victory

-March 2, 2018 Weekly Market Roundup. Volatility returned to the equity markets this week as stocks sold off on announced tariffs on steel (25%) and aluminum imports (10%), raising fears of a trade war. All U.S. equity market indices reported losses for the first week of March with the S&P 500 -1.98%, Dow Jones -2.97% and Nasdaq -1.12%. Meanwhile, the (CBOE VIX) jumped 19% to 19.59; despite the spike in VIX, volatility remains down more than 50% from its intraday peak last month. The capital markets are also still processing the upbeat Fed Chair (Powell) outlook that indicated a possible fourth rate hike this year, up from the three originally planned. It is our view that volatility typically continues for a short period after a market correction (-10%) and history tells us that this is not an uncommon occurrence in long-running bull markets. In fact, a recent Guggenheim study revealed “The majority of declines fall within the 5-10 percent range with an average recovery time of approximately one month, while declines between 10-20 percent have an average recovery period of approximately three months.”

-February 28, 2018 Monthly Market Roundup. February marked the worst month in over two years for the U.S. stock market on the heels of the -3.9% drop in the S&P 500. The month also concluded a 10-percent correction for the stock market; fortunately, strong earnings drove a partial rebound that made the monthly losses less precipitous. The S&P 500 is now down about 5.6 percent from its Jan. 26 record high. However, not only has the stock market correction relieved the market’s extreme overbought and low volatility conditions, the market showed a relatively strong recovery for the month until Fed Chair Powel hinted that the economic environment might justify four rate increases for the year (vs. the previously anticipated 3 rate hikes). Hence, the resurfacing threat of higher inflation and interest rates - which also was largely responsible for the earlier -10% correction - remained a worrisome overhang on the markets. It is our view that the 10-year treasury yield would need to exceed 4.75% before any recessionary impact on stocks (10-yr yield is currently 3.85%). We also foresee continued flattening of the yield curve and higher rates improving the outlook for short versus longer-term bond maturities. The good news: About 76% of the S&P 500 companies that have reported earnings have topped profit estimates - that is above the average 72% average for the past four quarters. Also, for 2018, S&P 500 earnings estimates have increased by $11.21 per share from $146.26 to $157.47. That’s a 7.7% increase. Overall, expectations are that corporate profits will keep rising and the global economy should keep strengthening.

Monthly Investment Insights & Market Summary Recap February 2018

2/1/2018

-February 23, 2018 Weekly Market Roundup. The U.S. equity markets ended the week with small positive moves, despite a volatile week of choppy trading. The S&P 500 returned +0.58%, the Dow Jones +0.36% and Nasdaq +1.35% for the week. The volatility overhand remains the concern over inflation and the Federal Open Market Committee (FOMC) policy guidance for 2018 rate increases; the minutes from the January FOMC meeting signaled policymakers’ increased confidence in the growth and inflation outlook. Fed rate increase fears continued weighing on the markets for much of the week as investors speculated that the Fed would raise interest rates three times this year, which is expected to begin from March when the committee members next meet. Mixed signals from the Fed at the end of its policy meeting on Wednesday also led to a surge in yield on the benchmark 10-year Treasury note, which rose to a 4-year high at above 2.95% - there is an inverse relationship between yield and treasure note prices, the latter of which continues to subject treasuries to price weakness. The FOMC silver lining, however, was the Fed report suggested no need for four rate hikes in 2018.

-February 16, 2018 Weekly Market Roundup. The U.S. equity market rebounded from its worst weekly loss in two years as most investors held positions despite a spike in volatility, a rise in Treasury yields, and increasing fears of imminent inflation over the last two weeks. For the week, the S&P 500 rebounded +5.92% as investors have turned their attention from rising inflation to the strong earnings picture. However, all boats were not up with the rising tide, as bonds continue to feel pressure of looming rate increases with the US Core Bond Index -0.41%, US Intermediate Government Bond Index -0.67% and US Short-term Treasuries -0.19% for the week.

-February 8, 2018 Equity Market Update. The S&P 500, which is the US broad equity index, reached its technical correction decline point after the market closed with another -3.75% loss on Thursday. A correction is any market downward move in excess of -10% from its highest peak (Jan 26) and of which the loss hasn’t exceeded -20%. From our calculation, the S&P 500 barely nudged through the -10% mark at its close of 2,581. Again, we assert that a S&P 500 stock market correction is about six-months overdue and we consider the process to be a healthy consolidation cycle. For perspective, it is useful to look at a few of the more recent correction spans: 5/21/15-2/11/16 was -14.2%, 4/29/11-10/3/11 was -19.4%, 4/23/10-7/2/10 was -16.0%. The takeaway is that correction cycles have normal frequencies of about every year-and-half and can extend for months before the secular bull mechanisms resume. The other larger point is that while there are certain inflationary and higher prospective interest rate concerns that have partly been a determining factor for the recent downward volatility in the markets, there are also technical trend cycles in play. As advisors, we remain vigilant in evaluating all factors to determine whether additional defensive strategies should be deployed. At this stage, we are not seeing anything particularly unique about this market correction relative to those of the recent past, all of which subsequently recovered to new highs. We apply a selective multi-asset return approach to diversity for risk management. This approach has minimized market-related loss exposure in our client portfolios. More specifically, the loss exposure to the S&P 500 remains in the 40%-60% range, a span derived from each client’s unique return goals and risk tolerance.

-February 6, 2018. The US equity markets are seeking an equilibrium between buyers and sellers, which has caused the S&P 500 to whipsaw all morning. Markets opened in the red with the S&P 500 falling -2.1% before bouncing back in the green where the equity index was up over 26 points, or about +1%. Then, the broad equity market index preceded to decline toward -1% and has since stabilized at break-even. Conversely, the Nasdaq has been holding relatively strong today. At this juncture, we don't know where the day's S&P 500 market close will end - however, we likely will see the continuation of equity market see-sawing. Volatility surged 106% yesterday and is currently trading at a sharply higher range of mid-40s; the long-term average VIX range should be somewhere between 15-20.

-February 5, 2018. What’s Going on with the Capital Markets? The sell-off in the U.S. stock market that began last week worsened on Monday, as the major indexes wiped out their year-to-date gains. Since hitting a record high on Jan. 26, the S&P 500 Index has fallen 8.5%. Meanwhile, the Dow Jones Industrial Average tumbled more than 1,100 points Monday, its steepest decline since 2011. At this juncture, it is important to remind our clients that we employ diverse multi-asset strategies to help mitigate the risk of material losses. Case in point is that with the S&P 500 down -4% today, our firm’s client portfolio losses have been far more muted with loss correlations being largely 40%-60% (depending on each client’s unique risk tolerance and return goals). To be specific, our client portfolio loss exposure range was 1.6%-to-2.4% at the market close. What we are seeing with this uptick of volatility is typical late-cycle behavior, though more exaggerated because investment assets are more sensitive to interest rate changes during late stage-cycles; also a precursor to the VIX spike was a sharp rise in bond yields. For example, there appear rising signs of inflation and this has spurred expectations that the Federal Reserve may hike interest rates more than anticipated in 2018. Yet, from a fundamental economic standpoint, high employment and strong pricing power isn’t such a bad problem to have. Stocks have been rising pretty much in a straight line since November 2016, and that's not exactly healthy. These are not big declines but rather overdue corrections. Indeed, with the exception of last year’s tiny -2.6% pullback, the S&P 500 hasn’t made it through a year in the past 20 without a temporary drop of at least -5.6%. The point is bull markets usually experience 2-3 pullbacks of -5% a year, along with a -10% correction every year-and-half or so. The larger point is that a market consolidation of a -10% correction is about six-months overdue and has the potential to run a bit deeper than where the S&P 500 trades now. That said, the mood remains overall positive globally on earnings growth and GDP, while tax benefits are expected to elevate corporate profits on the domestic-side in the first-half of 2018. There is also a fair amount of cash on the side, which is in place for opportunistic investments. Final thought is should markets exhibit a secular (long-term) trend of risk-off, we would implement portfolio strategies to mitigate exposure to any severe collapse in equity market values. To be clear, we do not think we are in a bear market but want to remind our clients that we are not complacent advisors that just ‘buy and hold.’

-February 3, 2018 Weekly Market Roundup. The equity market losses for the week were largely driven by Friday’s stock market rout, where the Dow, S&P 500 and Nasdaq composite posted their biggest weekly loss since early 2016; these leading equity indices experienced weekly declines of -4.1%, -3.9% and -3.5%, respectively. The impetus for the weekly losses can be attributed to different early and later week events. For instance, Amazon & Berkshire announced that they are collaborating to enter the healthcare industry, which rattled stocks in that sector early in the week, then on Friday investor jitters were related to: 1) tech darling earnings disappointments (APPL Iphone X, GOOG losses, etc.); 2) signs of inflation with the jobs report (treasury bond yields spiked); and, 3) the GOP memo showing further divisiveness amongst our country’s leadership. The message we would like to send to our clients is that we consider these corrections as healthy consolidations, which are normal market cycle episodes – also, from our calculation, the market is about 5-6 months overdue for its normal correction cycle which typically occurs every year and half.

-Before the Tech Bubble collapsed (In 1999), the economy was in its 8th year of expansion since the previous recession. Back then, job growth was rapid, and inflation fears from an overheating economy were increasing. Fast-forwarding to today, in 2018, the economy is in its 9th year of expansion since the Financial Crisis. Jobs are currently growing today as well, and fears of an overheating economy are similarly increasing. Conversely, in 2018 the economy is in its 9th year of expansion since the Financial Crisis. Jobs are currently growing today as well (along with earnings), and fears of an overheating economy are similarly increasing. (See graph below for relative basis of comparison of historical expansion periods)

Investment Insights & Financial Facts for the Month of January 2018

1/1/2018

-January 27, 2018 Weekly Market Roundup. Broad US equity indices posted their fourth consecutive weekly gain with the S&P 500 returning +2.23%, the Dow Jones gaining +2.09% and the Nasdaq moving +2.31%. The week’s positive equity performance was driven by stronger-than-expected earnings reports, along with a number of companies that expressed positive outlook guidance for 2018. GDP also rose at a steady +2.6% for the fourth quarter, as the markets now look for tax cuts to improve 2018 economic and corporate earnings growth. In turn, investment grade corporate bonds and treasuries remain under pressure by the near-term cloud of at least 2-3 rate hikes for 2018.

-The S&P 500 is up over 6% YTD for January. Since '50, when the S&P 500 has been up >5% or more, the broad equity market index finished in the green 12-out-of-12 times; the average gain was +24.8%. Further, the final 11 months closed higher 11-out-of-12 with '87 being the only year finishing lower.

-Our clients keep asking, "Can these nosebleed high equity valuations last, have these types of elevated price-earnings ratios occurred before with the S&P 500, particularly without some type of market correction (-10% range)?" The answer is "Yes, but with a caveat." First the good news, I turn you to the mid-1990s as an example of a high valuation period when strong earnings growth, which helped keep significant downside events out of the market. More specifically, from December 1991 through December 1994, the S&P 500 Index earnings grew more than 20% annualized. The trailing 12-month P/E began the period at 15.35, climbed above 20 by mid-1991 and stayed above that threshold until the first quarter of 1994. During this same period, the worst peak-to-trough decline in the S&P 500 Index was a drawdown of -8.47% (from February 2, 1994 to April 4, 1994). Putting this historical perspective aside, we still look for greater market volatility in 2018. In fact, a sharp rise in volatility would not necessarily require a deterioration in corporate earnings or economic conditions.

-January 12, 2018 Weekly Market Roundup. The U.S. equity markets posted another week of strong returns as bullish investor sentiment propelled major stock indices to new record highs. The S&P 500 gained +1.64%, the Dow Jones +2.01% and Nasdaq +1.89% for the second week of January. At the same time, US Aggregate Bond Index, Investment Grade Corporates and 1-3 Year Treasury continue to experience price weakness with the overhang of an anticipated 2-3 rate hikes this year. That said, we reiterate our bullish equity outlook for 2018 and though we anticipate increased volatility, we are steadfast in our views of, at least, high single digit positive equity returns.

-In yesterday's Wall Street Journal, "Advisers at Leading Discount Brokers Win Bonuses to Push Higher-Priced Products," conflicts of interest for discount broker advisors were highlighted, such as at Fidelity, TD Waterhouse, etc. According to the article,  the discount brokerage in-house advisers often tell clients they don’t get paid on commission and therefore don’t have conflicts of interest. Yet in reality, however, "advisers at some of the biggest brokerage discount brokerage firms make more money if they steer client's toward more-expensive products."  We, as independent RIAs, can bridge this conflict since we work in a conflict free environment given we are independent of the discount broker in which we choose have as our custodian. Furthermore, we purposely have chosen to not be licensed to accept any form of commission.

-Our Community Mudslide Devastation, A Personal Note: First, while we have experienced technical and logistical pitfalls from the tragic mudslide & debris events surrounding our community, our health has been unaffected. We also have had workarounds in place to mitigate the cable/wireless/power/telephone disruptions and our system continuity measures have provided for ongoing monitoring and adjustments of client portfolios. However, at times, we had no access to the Santa Barbara office due to the Highway 101 damage and this has necessitated client account maintenance to be handled remotely. We are heartbroken over the horrifying catastrophic destruction and great loss of life in Montecito. Our prayers and condolences continue to go out to those in our community that have experienced hardship and loss.

-The S&P 500 Index has gone 382 days without a 5% pullback, putting it just over two weeks away from the longest streak on record, dating back to 1929. In 2018, our client portfolios will have increased weightings overseas where valuations are over 20% cheaper, growth is intact, central banks remain accommodating and earnings are accelerating. In fact, just a mere 3% of overseas country economies are expected to encounter any form of contraction, which is the fewest foreign countries in recession on record.

-2018 STOCK MARKET FORECAST - S&P 500 EQUITY INDEX PREDICTION: There has been a lot of talk about how the equity markets have been induced by artificial liquidity injections by the Federal Reserve. Insofar as we believe in “don’t fight the Fed,” at the same time it is also the people’s money and institutional money that has been driving this rally, along with benign inflation, relatively low interest rates  and strong corporate profit trends. Based on about a dozen 2018 stock market predictions by Wall Street’s strategists the average S&P 500 target is +7.8% return, or a +209 gain to 2,883. Our internal forecasts are also (at least) high single digit returns, however, the forecasts by the top U.S. investment houses came with wide disparity on where stocks are headed. The most bullish year-end price target for the S&P 500 is 3,100, or nearly 16% higher than its current level of 2,674. The least optimistic prediction is 2,750, which represents a gain of about 2.8%. Keep in mind that company stock buybacks are expected to add about +2% to total returns alone this year. Also, following years like 2017 marked by above-average new highs and below-average volatility, volatility has historically picked up in subsequent years to rival the normal average of 50 big-movement days. Wall Street Strategist are also looking for double-digit earnings growth via high profit margins for the S&P 500 in 2018. For example, as of December 22, analysts estimate the earnings growth rate for the S&P 500 for calendar year 2018 to be +11.8%.

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