Second Quarter 2018 Client Commentary

Greetings from Huston-Fox Financial Advisory. We hope your summer is starting off smoothly.

U.S. stock and bond markets have struggled to stay focused on the underlying strong economic and corporate fundamentals in the face of possible trade wars erupting between the U.S., Canada, Mexico, Europe, and other smaller trading partners. Stock markets despise uncertainty and market returns for the first six months have been flat to negative with international markets getting crushed by an unexpectedly strong dollar.

For the first six months of 2018, the Dow Jones Industrial Average finished lower by 1% while the S&P 500 finished higher by 2%. The AGG or bond market index finished this time frame lower by over 3% due to rising interest rates. The U.S. stock market (S&P 500) started 2018 higher by 7% in January only to experience two downdrafts of 12% and 8% to finish June down about 4% from the January peak.

The Chinese stock market is now down 26% from a recent peak, including down 8% just in the month of June over trade war fears. The German stock market is down 6% for the year. These countries have high stakes in how this trade war/negotiation plays out over the next few months. Client portfolios have been more protected from these downdrafts due to limited international (non- U.S.) stock and bond exposure. Maintaining an emphasis on short term bond funds and floating rate funds on the bond side of portfolios has taken advantage of rising interest rates and reduced risk versus other bond categories such as the AGG.

What these trade war headlines overshadow is the very positive economic news on GDP growth, low unemployment, modest inflation, and strong corporate earnings. Yet, the emotional impact of this trade war talk cannot be minimized. Benjamin Graham wrote the first edition of The Intelligent Investor in 1949. While the text focuses on value investing, a significant portion focuses on controlling investor emotions when dealing with what he calls Mr. Market.

Behavioral finance teaches us the importance of controlling our natural reactions when faced with uncertain investment outcomes. Learning to manage Mr. Market’s focus on current price changes as a way of measuring investment success is a core pillar of the book. Ignoring short term price swings and focusing on investing fundamentals is the touchstone to successful investing.

A study of stock market history tells us that the small S & P 500 gain so far this year is pretty encouraging. Since 1950, there have been 35 years when the S & P was up at the start of summer (June 21). The remainder of those 35 years saw further gains 30 times, and only in 1987 was the loss through December more than 3 percent.

We are here to help with any questions. Pease always feel free to contact us. Our business continues to grow because of your trust, support, and referrals. Thank you.

Sincerely,

Ryan A. Fox, MBA|
Sean C. Huston, ChFC

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