MAY 2018 MARKET UPDATE

| May 14, 2018
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Macro Overview - May 2018

Markets continued on a volatile course in April following announcements regarding tariffs, rising rates, and geopolitical tensions, yet some economists and analysts expect that a tax cut driven rebound is possible.

The 10-year Treasury bond yield reached 3% for the first time since January 2, 2014, elevating inflationary fears and the onslaught of rising loan costs. The 3% mark represents a psychological hurdle that influences the dynamics of various fixed income sectors.

The market is concerned that the Fed and other central banks may need to take additional actions in order to alleviate a rapid rise in prices and wages should it materialize. Federal Reserve members voted not to raise rates during their May 1-2 meeting, yet are still on track to raise rates in June and perhaps twice more before year end.

Stocks have been trading in what traders call a trading range, meaning that prices move down and up but stay within certain levels. The release of earnings has become a key determinant of prices as the market looks for fundamental validations for pricing stocks. Company earnings in certain sectors have increased the most since 2010 while the environment for selecting stocks has become tactical and very selective, shying some investors away from the major indices.

U.S. companies benefited from the recent tax overhaul by reducing their effective tax rates and thus lowering their tax expenses. The decrease in tax expenses led to an increase in earnings for many companies, thus helping to propel stock valuations.

The U.S. Treasury issued $488 billion in government bonds for the first quarter of 2018, the most since 2008. The issuance is in anticipation of a drop in tax revenue from the recent tax cuts. Some economists believe that the benefits of the tax plan have not been realized yet as it may take months for visible benefits to appear.

Oil prices reached their highest levels in more than three years as geopolitical tensions drove uncertainty. Shrinking supplies and the approaching summer driving season are expected to heighten gasoline prices across the country.

The most recent data from the Department of Commerce revealed that GDP grew at an annual rate of 2.3% for the first quarter of 2018, a deceleration from the 3% growth that occurred in the final 9 months of 2017. Encouraging data released by the University of Michigan reveals that consumer sentiment rose in April driven by favorable views on personal finances and incomes.

Sources: Dept. of Commerce, Fed, U.S. Treasury, BLS

10-Year Treasury Bond Hits 3% - Fixed Income Overview

The 10-year Treasury bond yield reached 3%, a psychological level for the bond market. Breaching the 3% mark is expected to pose lending constraints for businesses and consumers as loan costs rise.

The drop in bond prices has placed bonds as a more attractive option for income seeking investors since bonds are favored during periods of market volatility due to traditionally experiencing less volatility than stocks.

Short-term rates and long-term rates are coming closer together, known as a flattening yield curve. Short-term rates are rising faster, which are highly influenced by the Federal Reserve’s rate increases. Long-term rates are established by the market as well as the expectation of economic growth and inflation.

The issuance of corporate debt by companies is increasing before rising rates heighten the cost to borrow above current levels. A demand for fixed income globally continues to fuel the issuance of new bond issues as well.

Consumers and homeowners with loans tied to rising short-term rates, such as the Libor and Fed Funds rates, are expected to feel the effects of rising rates the most.

Sources: Bloomberg, U.S. Treasury, Federal Reserve

Benefits of Stock Dividends During Market Volatility - Financial Planning

As interest rates have dropped over the past eight years, investors seeking income sought out the benefits of stock dividends. Companies with healthy cash flows and steady earnings tend to pay consistent dividends to shareholders. Such dividends offer a stream of income usually paid out on a quarterly basis while also offering the opportunity for long-term capital appreciation from the price of the underlying stock.

During periods of increased market volatility, dividends act as a buffer against the uncertainty of companies’ earnings and a changing economic environment. Dividend paying stocks tend to be largely held by institutions and pension plans seeking consistent income in addition to conservative long-term growth.

Management becomes more accountable with dividends since a reliable stream of cash flow and earnings is essential in order to maintain consistent dividend payouts. Companies may also tend to increase their dividend payouts as their earnings and cash flow increases, acting as a hedge against inflationary pressures.

Historically, stocks termed as value companies that have reached their growth cycle tend to be dividend payers, versus growth companies that would rather reinvest their cash back into their companies for further growth. Over the past few years, the amount of cash accumulated by companies after paying all debt and operating expenses has increased, allowing some growth companies, such as those in the technology sector, to pay dividends to stock holders.

Many investors have found that a balance between dividend paying stocks and interest paying bonds tends to generate consistent and reliable income streams, and with conservative growth.

Source: S&P, Bloomberg, Dow Jones

What Could Cost More In Retirement - Retirement Planning

As retirement nears for millions of aging baby boomers, the realization of how to pay for retirement becomes a challenge for many.

Expenses that one was accustomed to while still working and raising a family changes dramatically once retirement arrives. The biggest challenge for many is how to maintain the same lifestyle in retirement as during working years.

Unfortunately, many have realized that Social Security and menial retirement savings just aren't enough to make up for lost wages. This either forces many retirees to seek part-time employment or merely live a less desirable lifestyle in order to minimize expenses.

Unforeseen expenses such as an illness not covered by Medicare or health insurance, home repairs, and emergency cash outlays may deplete valuable cash savings and derail what was thought to be a well executed financial plan. Retirees have found that liquidity during retirement is critical, thus avoiding the necessity to sell investments at gains or losses and even reducing income derived from them.

The biggest surprise that retirees are having is the increasing costs of drugs and healthcare. The Employment Benefit Research Institute has identified a number of expenses not necessarily planned for that are common among retirees: Special diets with foods and ingredients that may be more expensive than average, medical & toiletry items such as supplements and diapers, special transportation, medicare part A & B items not covered.

Sources: Employment Benefit Research, Social Security Adm., Medicare.gov

**Market Returns: All data is indicative of total return which includes capital gain/loss and reinvested dividends for noted period. Index data sources; MSCI, DJ-UBSCI, WTI, IDC, S&P. The information provided is believed to be reliable, but its accuracy or completeness is not warranted. This material is not intended as an offer or solicitation for the purchase or sale of any stock, bond, mutual fund, or any other financial instrument. The views and strategies discussed herein may not be appropriate and/or suitable for all investors. This material is meant solely for informational purposes, and is not intended to suffice as any type of accounting, legal, tax, or estate planning advice. Any and all forecasts mentioned are for illustrative purposes only and should not be interpreted as investment recommendations.

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