Q2 2016 Newsletter

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Brexit, Bremain or just plain Brewilderment?  As all of you are probably aware, the United Kingdom made an historic decision to leave the European Union (EU).  We saw volatility spike as the Brexit camp won, and just as quickly as markets dropped, they retraced themselves. Brexit fear seemingly disappeared.  To add to this historic event, as of this writing, the yield on the 10-yr Treasury note has just hit a new record low.

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Short-term market gyrations are typically caused by uncertainty over headline risks.  Over longer periods of time, markets are impacted by economic forces.  To that end, the economic environment over the past 18 months has been difficult.  As I have written before, we are currently in a corporate earnings recession, not necessarily an economic one. Equity markets remain flat and the challenge going forward persists.

Looking overseas, the approaching risk is what impact the Brexit will have on the rest of the EU countries. It will be more problematic for other countries to leave because they are all more closely tied to the Euro. However, each of the member states has individual issues within the organization. Currently, I am watching Italian banks, as a Wall Street Journal report claims 17% of their loans are bad.  I am less concerned about a country leaving the EU, and more focused on how the EU will deal with the next Greece if it materializes.

I must emphasize that recent market volatility is a normal part of the investment cycle.  In fact, according to a Goldman Sachs study, there have been 21 years of positive market returns since 1990 and, in 19 of those 21 years, the S&P 500 index spent some portion of the year in negative territory.

Domestically, we need strong job growth and an earnings rebound to get the stock market going.  There is definitely potential as the dollar strength shows signs of peaking. Also, the Federal Reserve signaling they are not as eager to raise interest rates could have a positive impact on corporate earnings.   Our move into more value-oriented and dividend-focused securities over the past 6 months has worked well and we will continue to make adjustments as we navigate this business cycle.

Best Regards,
Marc Henn CFP ®, President

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