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Quarterly Commentary – December 2015

Despite the perceived volatility, the last quarter of the year recovered some previously lost ground and turned out to be nicely positive for U.S. equities. This gain happened mostly in October and the last couple of months of the year were spent in seesaw action that on the balance went nowhere. The net effect of all the ups and downs during 2015 led to a relatively flat year. The following are performance numbers from various popular indexes. Index numbers are not individually comparable to a properly diversified portfolio. Each portfolio may include an allocation to securities similar to these indexes in varying amounts based on your personal risk tolerance and should only be compared in that context. The S&P 500 was up 1.4% for the year. The Dow Jones Industrial Average was up 0.2%. Small company stocks represented by the Russell 2000 Index ended down 4.4% for the year. International equities as represented by the MSCI World Ex U.S. Index were down 3.0%. Emerging markets represented by the MSCI Emerging Markets Index were down 16.9%. Fixed Income as represented by the Barclays Aggregate Bond Index closed up 0.5% for the year.

The U.S. economy has continued to muddle through in 2015. It has basically experienced slow but positive economic growth since the aftermath of the great recession. Slow growth had been anticipated as the result of the hangover from the credit crisis. During that time inflation has also remained below historical trend by staying under 2%.

Meanwhile, in order to increase earnings, companies have had to be leaner and more efficient while they had to contend with slower revenue growth. The resulting efficiencies implemented to grow earnings, when not offset by the burden of additional regulations, have put companies in a strong position. It has however limited further bottom line improvements pending more economic growth both in the U.S. and globally.

Some of the factors that have impacted markets in 2015 included activities from central bank monetary policies, Chinas slowing growth and transition to a consumer-based economy, anemic growth from the Eurozone, the dramatic fall in oil prices and other commodities as well as increasing geopolitical tensions. Additionally, after a couple of years of speculation about the start of the rate tightening cycle, the Fed finally moved away from its zero interest rate policy for the first time since 2008. Consider that it had been nearly a decade since the last rate hike. The initial reaction by the stock market was minimal, and the relatively minor impact in the bond market suggested that this was an expected move. This removed a much debated uncertainty over the issue of when the Fed would start to raise rates. Left to uncertainty will be the pace at which the Fed continues to raise rates. It is expected that this will take into account the U.S. dollar. Higher rates here in the U.S. promote a stronger dollar. A stronger dollar acts as a drag on the U.S. economy and hurts corporate earnings and commodity prices. Continued dollar strength would likely slow the pace of the Feds future rate increases and any dollar weakness or bounce in commodity prices or inflation might provide opportunities to trigger a faster pace of increases to the extent the economy is viewed as strong enough to sustain it.

Overall, the choppy price action in global financial markets is the result of some uncertainty resulting from concerns over global growth, disinflationary pressures and the U.S. as it tries to return to more normal interest rate levels. It is important to remember that the U.S. equity market has had an impressive rebound from the low of 2009 and a pause at this juncture is not unwarranted. It should not be cause for alarm, particularly if one understands and adopts a long term view of investing, which over time is a proven sensible approach for most investors. Patience does get rewarded.

We are thankful for the opportunity to serve you and wish you a very Happy New Year, in health and prosperity.