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Quarterly Commentary, Q1 2016

Benchmark Returns for the Period Ended March 2016

Annualized
Quarter 1 Year 5 Year 10 Year
US Treasury Bills (one month) 0.01% 0.02% 0.03% 1.13%
Barclays Capital US Gov’t/Credit Inter Bond 2.45% 2.06% 3.01% 4.34%
Standard & Poor’s 500 1.35% 1.78% 11.58% 7.01%
Russell 1000 Value (large cap value) 1.64% -1.54% 10.25% 5.72%
Russell 2000 (small cap) -1.52% -9.76% 7.20% 5.26%
Morgan Stanley Europe, Australia and Far East (EAFE) -3.01% -8.27% 2.29% 1.80%
Wilshire REIT 5.20% 4.76% 12.11% 6.29%

Quarterly Commentary

The US economy continues to grow at a moderate pace overall. GDP for the fourth quarter was revised upward to a 1.4% annualized pace from the previously estimated 1%. This was attributed to an unexpected rise in consumer spending, which now makes up two thirds of US economic activity. First quarter GDP annualized growth estimates are around 1.5%. Meanwhile, the unemployment rate continues to fall to an eight-year low of 5%. Corporate earnings, the anomaly, fell for the second straight quarter due to a strong dollar and cheap oil undercutting profits. Crude oil fell more than 60% from its high of $100 in June 2014.

Inflation is closing in on the Federal Reserve’s 2% target. A moderately growing economy, a strong jobs market, and normalizing inflation will likely prompt the Fed to raise interest rates this year, but more slowly than previously anticipated.

Domestic equities showed substantial movement from their mid-quarter lows. Although the Dow was down 10% at one point, it recovered, gaining 1.09%, and marking the largest quarterly comeback since 1933. Small Cap stocks, as represented by the Russell 2000 Index, dropped 1.52%. REITs, the strongest domestic asset class this quarter, finished up 5.20%. The yield on the 10-Year Treasury declined slightly, ending at 1.78%.

International equity markets were mixed, and showed the best and worst asset class performance. After three years of dismal returns, Emerging Markets was the best performing asset class with a positive return and a dramatic inflow of new money. The MSCI Emerging Markets Index hit a seven-year low in January followed by a 22% gain, and closed the quarter up 5.71%. In contrast, the EAFE ended the quarter down 3.01%.

Geopolitical events, including terrorist attacks, continue to occupy the attention of the media, yet appear to only have a short-term impact on equity markets. Unless these events change longer-term variables of market strength, like personal spending and business confidence, their impact on the broader economic picture will remain transitory. The impending presidential election may also be of concern to investors. For some, it can be difficult to separate political leanings from investment decisions. Yet after hundreds of years of study on election cycles, the data remain inconclusive. Equity markets tend to respond positively to presidential election years, but the market’s preference for one political party over another is too close to be meaningful. Democrats do, however, have a slight lead.

The struggle between an investor’s logic and instinct can be unrelenting. Investor, businessman, and philanthropist Sir John Templeton offered this keen insight: “The four most dangerous words in investing are, ‘this time it’s different.’”

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Indices are not available for direct investment; therefore their performance does not reflect the expenses associated with the management of an actual portfolio. The index returns above assume reinvestment of all distributions. This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale.

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