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Quarterly Commentary, Q2 2017

Benchmark Returns for the Period Ended June 2017

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Annualized
Quarter 1 Year 5 Year 10 Year
US Treasury Bills (one month) 0.18% 0.40% 0.12% 0.45%
Barclays Capital US Gov’t/Credit Inter Bond 0.94% -0.21% 1.77% 3.87%
Standard & Poor’s 500 3.09% 17.90% 14.63% 7.18%
Russell 1000 Value (large cap value) 1.34% 15.53% 13.94% 5.57%
Russell 2000 (small cap) 2.46% 24.60% 13.70% 6.92%
Morgan Stanley Europe, Australia and Far East (EAFE) 6.12% 20.27% 8.69% 1.03%
Wilshire REIT 1.78% -1.71% 9.35% 5.63%

Quarterly Commentary

U.S. economic growth was stronger than initially estimated in the second quarter due to unexpected higher consumer spending and an increase in exports. Current GDP figures show that the economy grew at an annualized rate of 3.00% during the second quarter. Improvement in the labor market is also evident with unemployment at a 16-year low of 4.30% – below what is considered “full employment.” The Fed’s latest message was upbeat, saying it believes the U.S. economy is on firm footing as it enters its ninth year of recovery. That sentiment was supported by its fourth rate hike in June, pushing forward with the plan to normalize short-term interest rates. This was the second increase of 2017, and the Fed signaled its intention to raise rates once more this year and three times next year. The yield on the 10-Year Treasury, which is less closely tied to the shorter-term Fed funds rate, declined to 2.31%.

Nearly all asset classes, domestic and international, experienced positive quarterly returns. The Dow has set 39 new record closing highs since the 2016 presidential election, and closed out the quarter up 3.95%. The S&P 500 ended the quarter with its seventh straight quarter of positive returns, posting a gain of 3.09%. The NASDAQ composite posted a 4.16% quarterly return. REIT’s and small cap stocks, as represented by the Wilshire REIT and Russell 2000, experienced the lowest positive returns domestically with gains of 1.78% and 2.46%, respectively.

After five years of lagging performance, International equities continue to outperform U.S. equities posting the best relative performance. With the tailwind of a weakened U.S. dollar and improving economic data abroad, International markets, as represented by the International EAFE and the MSCI Emerging Markets indexes, posted strong quarterly gains of 6.12% and 6.27%, respectively.

In wealth management, you often hear about the “expected average return” for a portfolio. That expected return of X% focuses us on one positive, palatable, and comforting number. It feels great and meets our goals. That is, until we experience a below-average year and immediately forget about all the above-average years. Realistically, the road to achieving that expected average return rarely feels average – because it rarely is average. The history of the S&P 500 is a good example of what average really means and why we need to manage our expectations. Since 1926 the average annual return of the S&P 500 has been approximately 11%. In those 90 years, however, the S&P 500 only hit 11% once and was between 10% and 12% just three times. The extreme years of -43% and +52% were far from average!  Successful investors understand the value of achieving “expected average returns” and align their expectations with reality.

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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