2018 SEMI-ANNUAL REPORT

The stock market, after a solid 2017, set an historical high in late January, then reversed direction and turned negative.  Stocks did recover somewhat and were essentially unchanged since year-end.  For the six-month period, the Dow Jones Industrial Average was down 1.8% and the Standard and Poor’s 500 Stock Index increased 1.7%.

Bond prices have been up and down also since year-end.  Their prices, which move inversely to interest rates, declined somewhat during the six months – reflecting

higher interest rates.  The yield on the 10-year U.S. Treasury Note increased from 2.45% on December 31, 2017 to 2.85% on June 30, 2018.

International stocks, having outperformed domestic stocks in 2017, were generally mixed during the quarter and since year-end.

Looking ahead for stocks, we expect more volatility.  There are plenty of challenges to be worried about.  Investors most likely will continue to be jittery, primarily about trade tensions and political uncertainty in the Eurozone.  On the positive side, the enormous fiscal stimulus of lower tax-rates will continue to give the economy plenty of momentum. The probability of a recession in the next two years is also low.   Inflation remains pretty tame, with the Core Consumer Price Index increasing 2.2% in the 12 months ended in May.  The price earnings ratio for the S&P 500 is down from 18.6x at the market’s peak in January to 16.2x, just slightly above the 10-year average of 14.8x.

As such, we feel our target of an 8% return for the full year is still realistic despite all the expected turbulence.

You will recall that, after assessing imminent and future economic trends, we then determine the weightings among the 11 industry sectors.  We believe the technology, financial, energy, and healthcare industries are especially attractive for the second half of this year.

Our U.S. common stock selection focuses on companies with strong balance sheets, attractive and growing dividends, and which have a good earnings outlook.  Our mutual fund approach primarily focuses on large capitalization stock funds stressing blue chip companies, technology and healthcare stocks.  Where applicable, investments in mid-cap and small-cap funds provide further diversification.

We expect another two or three interest rate hikes by the Federal Reserve Board before year-end.   In the bond section of portfolios, we continue to adhere to achieving principal safety first, and income second, by investing in high quality short (one to three years) and intermediate (three to seven years) bonds.  Their prices decline less than those of longer dated debt when interest rates rise.

 

The correction and bumpy ride we have just experienced, were inevitable.  We may well expect more of the same throughout the balance of 2018.  Our group, however, feels our diversified portfolio approach, emphasizing industry leading, high quality domestic stocks (among selected industry sectors), and international stocks – combined with bonds for portfolio stability – will again prove effective over time.

We are looking forward to a productive six months.