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Quarterly Commentary – September 2017

The U.S. Equity markets moved up during the third quarter of 2017. The following are performance numbers from various popular indexes. Please remember 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 14.2% for 2017. The Dow Jones Industrial Average was up 15.5%. The Nasdaq Composite Index was up 20.7%. The Russell 2000 Index was up 10.9%. International equities as represented by the MSCI World Ex U.S. Index were up 19.2%. Fixed Income as represented by the Barclays Aggregate Bond Index ended up 3.1% for the year.

Despite a good showing this year in U.S. equities, the bigger story on performance is outside the U.S. and particularly markets in emerging economies. Emerging market equities had outperformed U.S. equities from the beginning of the century until the financial crisis which caused an even more brutal correction there than experienced in U.S. equities. The following years emerging markets equities did not go anywhere after an initial rebound as they faced a series of headwinds to include weaker global growth, declining exports, collapsing commodity prices and currencies, rising inflation and capital flight to safer areas such as the U.S. where monetary policies provided support. The tide reversed for emerging markets earlier in 2016 and continued to reflect strength in 2017 by significantly outpacing U.S. equities. If non-U.S. stocks maintain their performance advantage over U.S. equities through the rest of the year, it would be the first time since 2012 that non-U.S. stocks outperformed the U.S. for a calendar year.

The gross domestic product at the global level was the strongest since the first half of 2011 reflecting the significant strengthening of the global business cycle since the middle of 2016. While the U.S. has been the engine of global growth since the end of the financial crisis, there is evidence that emerging markets as well as the more developed markets such as Europe and those in Asia are starting to surprise and may lead going forward. The U.S. does remain a beneficiary of that growth as large businesses source almost half of their revenues outside of the U.S. In relative terms, equity valuations are more attractive outside our borders. Opinions on valuations on U.S. equities are wide ranging. They may appear stretched relative to their own history, but it is important to consider valuations relative to other asset classes and relative to bonds and cash and in that regard, we think they remain attractive particularly in certain areas of the market. The global economy is in a Goldilocks scenario with strong enough growth but not too strong as to trigger extreme tightening from central banks. The interesting thing to note about emerging markets is the dramatic transformation from economies which were often based on commodity exports to newer generations of very innovative companies involved in value-added production, processes and services. It is certainly going to be an exciting place with some interesting tail winds as it relates to demographics and the massive inflow of age productive people into these labor forces and those innovative areas.

Though some short-term weather-related disruption could hold things back, the U.S. economy seems to be on path of robust growth assisted by healthy consumer spending and business investment. Second quarter GDP growth was revised to 3.1%. This has allowed the Fed to continue its path of normalizing monetary policy. Inflation has remained tepid and some possible explanation could be the structure of the work force as the baby boomer generation with relatively higher salaries have retired and have been replaced by younger employees and lower wages.

The world remains full of uncertainties here at home regarding policies and on the geopolitical front but thus far markets have shrugged it off and have appeared immune to corrective setbacks. This obviously could change at any time.

We hope you are looking forward to some cooler weather. Thank you for the opportunity to serve you.