2017 SEMI-ANNUAL REPORT

The Dow Jones Industrial Average and Standard and Poor’s 500 each rose about 8% since year end, the best start to a year since 2013.  Stock prices were boosted by solid corporate earnings and investors’ expectations for improving economic growth.

 

U.S. government bond yields continued to rise with the yield on the 10-year U.S. Treasury Note climbing to 2.30% from a low of 1.37% last July, but down slightly from 2.45% at the end of the year.  Bond yields around the world have risen recently as central bank officials signaled they could be closer to withdrawing monetary stimulus.   Year-to-date, however, bond prices, which move inversely to interest rates, have remained almost the same.

 

International stocks, after not performing as well as domestic stocks in 2016, have outperformed U.S. stocks during the past six months.  Recent economic growth in Europe and Asia, coupled with less political tension, have been the primary catalysts.

 

Looking ahead for stocks, investors are now asking whether the strong first half is a harbinger of a choppier second half, or continued strength.  We do know that stocks are not cheap.  The S&P 500 trades at about 18 times projected earnings over the next 12 months.  Still, this forward multiple was above 26 at the dot-com bubble’s peak in 2000, and 24 at the beginning of the real estate bubble in 2008.  Much will depend upon a pick-up in earnings.  Investors will be encouraged if taxes are lowered, there are less regulations, and more infrastructure spending.

 

We feel some of the biggest risks for stocks include geopolitical tensions – North Korea, in particular.  Another possible risk is that the world is oversupplied with oil, which could lead to another drop in oil prices which could hurt stock returns.  There is always a risk that the Fed will raise interest rates too quickly, or unexpectedly, causing a slowdown in economic growth.

 

 

Since year-end, our focus has been buying and holding high quality companies that, in our view, can demonstrate growth in earnings and dividends.  In the context of our “top-to-bottom” stock investment approach, we continue to feel that stocks within the technology, health care, and consumer staples industries, look especially attractive.

 

Our mutual fund approach for the balance of 2017 will not change.  We feel that a diversified blend of stock and bond funds, meeting our criteria of havingbelow average expense ratios, below average risk (volatility), and having achieved consistently good rates of return versus their peers, should prove effective over time.

 

Valuations are more modest elsewhere.  Where applicable, we have either initiated or added to international stocks for continued potential principal appreciation.

 

We look for continued slightly higher interest rates throughout the balance of 2017.  The Fed has indicated it will raise rates one more time this year, and possibly twice in 2018.  Our bond philosophy, intended to attain relative safety of principal and reliable income, should prove effective if this scenario unfolds.  That philosophy leads us to focus on bonds and bond funds that are not considered long-term. Their average maturity of 5 years implies less sensitivity to changes in interest rates.