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3rd Quarter 2017 in Review

After struggling in August, both large and small cap stocks rebounded in September. For most of the quarter we saw a continuation of growth and large cap stocks outperforming value and small cap stocks. However, in a welcome change, the opposite was true in September. After 45 years in the business, we have seen smaller and value oriented stocks normally do better. This has not been true the last few years but we anticipate a reversal to more normal markets.

While many market indices have hit record levels, we are finding risk for larger, growth oriented stocks is rising. Valuation levels are extended and the economy does not look like it will pick up much speed in the months to come. In addition, sentiment readings are high, usually a negative for stocks. Lastly, the Federal Reserve (Fed) has been raising rates and now looks poised to reduce its balance sheet, something called Quantitative Tightening. Much of the market’s previous advance, and the favoring of larger growth stocks, has been correlated to Quantitative Easing. This reversal by the Fed will likely have a significant and long lasting impact on stocks. We believe this will benefit the bargain type securities we tend to favor.

Bonds faded as the quarter progressed, but they still provide a cushion in balanced accounts when stocks correct. We do not believe it is a time to be overly aggressive with bond maturities, and we would maintain modest durations.

Patience is a virtue and we have been patiently waiting to see the market reward common sense investing. If we are right, we believe this should be a good time to own bargain stocks (those with low valuations, growing earnings and excellent price strength), the kind we try to put into your portfolio.

Market Outlook

While the stock market has been hitting new highs, risks of a correction have also been rising. Excessive valuations and an upside down market (stocks with no earnings doing better than those with earnings) lead us to take a conservative posture towards equities at this time. On a positive note, the market is digesting possible tax law changes, and we are seeing signs of some market rotation. While larger and more expensive stocks had been leading we are starting to see a crack in this movement, with smaller, bargain oriented stocks starting to perform nicely. This has contributed to the improved results during September.


* S&P 500 is a leading indicator of US equities and is meant to reflect the risk/return characteristics of the large cap universe. Dow Jones Industrial Average is a priceweighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. Typical Stock refers to median stock in the JIR universe which follows over 8,000 stocks.

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