“Getting deliberately rich or achieving consistent financial performance is at least as much a psychological problem as it is a logical problem.”^[1]

Emotion is one of an investor's greatest enemies. 2016 opened with the Dow Jones Industrial Average having its worst five-day start in history. Despite the hand-wringing declines to begin the year, the market has bounced back nicely. By the end of the quarter, the average diversified U.S. stock mutual fund had clawed back enough to close down less than 1% for the first quarter, and the average international stock fund closed down 1.7%.

Fear makes it hard to remain optimistic about holding shares whose prices have declined; just as envy makes it hard to refrain from buying the appreciating assets others are enjoying owning. We have recently endured our share of pain in a handful of cyclical companies. We have gone through these cycles in the past, and they are never any fun. However, we keep a balanced mix of exposure for this very reason and are confident that our current holdings are well positioned to buoy portfolios.

Time and time again, we have discussed the benefits of value investing and the importance of staying with it through thick and thin.  It was refreshing to read a recent article which complements our beliefs.   In the March 14, 2016 Barron's publication, the article within this edition entitled, “It's Time for Value,” sited “After nine years of underperformance, value stocks look poised to shine.”[2]

But in the framework that value is built upon, you must have the right mindset when you digest this news.  The Barron's article reiterated this point as well, “After such a long period of disfavor, value investing could be on the verge of a multi-year comeback.  But it could require patience.”[3]

We whole-heartedly agree.

[1] Morris, W. T., HOW TO GET RICH SLOWLY, BUT ALMOST SURELY, ©1973 (There is no sure way to wealth.)

[2] Barron's, March 14, 2016, It's Time for Value

[3] Barron's, March 14, 2016, It's Time for Value

The Dow Jones Industrial Average is an index that shows how 30 large, publicly owned companies based in the United States have traded during a standard trading session in the stock market.

No doubt, 2015 was a difficult year for active money managers. In order to win, you needed to be concentrated in a few large stocks and hold on to them. If you didn't, you were likely to be negative for the year. As of late December, the average S&P 500 stock was nearly 20% below its 52-week high!

Our value strategy makes it difficult to justify owning high flying stocks at a price earnings ratio that is at least double the S&P 500. Valuations like this don't fit our discipline.

The Chosen Few

Our market letters throughout last year repeatedly cautioned that the market advance was becoming more and more concentrated in a few popular companies. In many ways, this market action reminds us of the late 1999 dot.com bubble. At that time, like now, market action concentrated on fewer and fewer companies that rose dramatically. We all know how that ended.

Are we at an Inflection Point?

At some point, leadership always changes as markets go through their inevitable cycles. We believe we are there. Jim Paulsen, Chief Investment Strategist of Wells Capital Management Inc., seemed to agree with us in a recent market commentary. He stated that the recent interest rate hike highlights that the U.S recovery has finally reached some semblance of full employment. In the post-war era, once a 5% unemployment rate was reached, both the character and the performance of the U.S stock market have been altered. This type of environment has favored stock pickers, which is what we are. As this shift happens, our portfolios should benefit. 

Is “the Sky Falling”?

About the same day you received your October Market Update from us, Monday morning quarterbacks were out in force as our beloved Seahawks had just lost to Carolina in another late-game defensive collapse to fall to a record of just 2 wins against 4 losses. The pundits and casual fans alike were piling on with all manner of criticisms. Rather than panic and change course, the organization insisted that “the sky is not falling” and maintained a steadfast commitment to its process and discipline. As you know, the Seahawks have gone on to clinch another playoff spot. Temporary underperformance and criticism did not tempt the staff to veer off a plan. We aren't either.

Like the Seahawks, we feel like our value style, discipline, and process are poised for a nice run.

Correction or crisis?  Know the difference

“The key to making money in stocks is not to get scared out of them.”  -  Peter Lynch

As every sports pundit reminds us, our beloved Seahawks again started their season in the hole. Armchair analysts have prescribed countless remedies. New legions of fans continue to hold lofty expectations, but how quickly we forget that our Hawks struggled to attain 3-3 last fall… ahem, on their way to another Super Bowl appearance.

Sports fans and investors have much in common. Both are prone to the same critical mistake of assuming that good, short-term outcomes are the result of a successful process, and that bad outcomes simply imply a failed process. In fact, the best long-term performers in any probabilistic field emphasize a disciplined process over an immediate result.

This fall, as the stock market shows us its volatile side, we want to remind our clients that one of the biggest risks we face is one of human psyche. The key question is: Will investors withstand the whipsaw of a volatile ride long enough to fully participate in a recovery over time? Here's some “coaching” to help you answer this question for yourself.

The playing field: Value stocks have underperformed growth stocks late in the current economic cycle.  This has happened only six times since 1945.  In our view, this may portend a change in market leadership. Investors are evaluating potential for a Fed-driven rise in rates for the first time in almost a decade. History shows that when interest rates are low and getting lower (2010-15), growth stocks tend to outperform, and especially during the six months leading up to a rate increase.  This occurs because growth stocks tend to be valued based on future earnings. Value stocks, on the other hand, are priced based on actual cash flows – a “bird in hand” approach, according to Barron's columnist Leslie Norton. Ultimately, when the Fed actually does increases rates, value stocks subsequently tend to outperform. In such an environment, we are confident that our value-driven investment discipline stands to benefit.

Recruiting undrafted talent:  For the past year, the investment herds have concentrated much of their buying on a narrowing list of popular stocks because they view them as “no brainers.”  Not exactly. Howard Marks, of Oaktree Capital, puts it well: “When everyone believes something embodies no risk, they usually bid it up to a point where it's enormously risky.”  On the other hand, “when everyone believes something is risky, their unwillingness to buy usually reduces its price to a point where it's not risky at all.” 

Know thy enemy: In the face a short-term struggle, investors are often haunted by our last historic financial crisis. Rather than recognizing a near-term market correction as opportunity, they too often fear monsters under the bed, and pull the covers tight.

Therefore, we want to emphasize some glaring differences between the struggle of 2015 and that of 2008-09.  Durable goods (cars, appliances, etc.) are selling at a breakneck pace. Bank lending is ramping up, and with stringent credit safeguards in place. Just compare the paperwork of a loan application today versus 10 years ago. Housing and commercial real estate are healthy -- just plain booming in Seattle. Unemployment is down and holding. Even gasoline and gold are cheap. Average prices for stocks are relatively low. Inflation is modest. Little of this was true when the crisis hit us seven years ago.

As we enter the final quarter of 2015, we understand it's been a trying period for investors holding virtually any type of risk assets. We also see value stocks as poised for potential market leadership, and we recognize this cycle for what we believe it is – a short-term challenge coupled with a valuable opportunity for selective buying on the market dips.

StarCapital research has shown that value has outperformed growth over the long haul. Value is also our discipline of choice. Our expectation is that a strategic, value-driven discipline will prevail in the long run, and we are encouraged by recent evidence that the privilege of market leadership may come our way soon.

Trophy of market leadership seems to be changing hands

Momentum is powerful – never permanent. Just ask Tiger Woods after June's U.S. Open at Chambers Bay or LeBron James after the last NBA finals. Yesterday's champions are doing conciliatory interviews while an ever-changing list of competitors is busy getting new names etched onto a trophy.

As we enter the third quarter of 2015, the potential for rotation in the stock market is glaringly evident. The trophy of market leadership appears to be changing hands as we speak. A narrow band of large-cap growth stocks that was leading the S&P 500 Index has become uncomfortably pricey. The tailwind of momentum that we have been describing during recent quarters appears to be waning, and the possibility of greater appreciation in value-priced stocks exist in the near to medium term.

None of this should come as a shock to our investors. We've been here before – if this year's momentum-to-value shift follows our script, we believe it will essentially be a PG-rated version of 1999. It was 16 years ago when irrational exuberance of technology startups swept across investors' psyche with a vengeance.  The fundamentals of corporate balance sheets and earnings growth were seen as relics from an “old school” economy.

Fortunately, today's wave of investor sentiment – irrational at times – appears to be cresting more gently. We expect a market rotation with less harmful upheaval, and here are some telltale signals to evaluate as we enter the second half of 2015:

• Bumpy ride to nowhere – Through June, the S&P 500 is little changed from where it was before Christmas, traveling a jagged road to nowhere. But this flat first-half performance masks increasingly volatile return patterns. The average stock chart looked tempting in early 2014, but today the combination of higher overall valuations and increased volatility are daunting.

• Restless herd – Many investors appear to have grown fearful, so the masses may be prone to overreaction. The AAII Investor Sentiment Survey shows bullish sentiment has fallen to a two-year low. As of June 17, only 24% of investors expected the stock market would rise during the upcoming six months; 34% of investors were bearish, 40% were neutral.*

• Bullish contrarians – While mainstream sentiment has grown bearish, the market's contrarians are growing excited about the prospects of a sell-off in some market segments, which creates opportunity.

• Active selectivity – During momentum-led markets, passive investing in broad stock indexes is often rewarded, as was the case last year. But in a rotation away from momentum, active investing – a process of discriminating stock selection – is often more rewarded.

• Fed rates and election – The Federal Reserve is fully expected to introduce a modest interest rate increase this fall, but most expect the Fed will use a gentle policy touch as the 2016 presidential election year comes upon us. A dovish approach generally means lower risk of dramatic market reaction.

History tells us diversification is often rewarded, especially when market leadership rotates unpredictably on the winds of shifting sentiment. The same history shows us a pattern of market leadership that resembles a multi-colored quilt of changing forces – today's performance leaders often become tomorrow's laggards, and vice versa.

For all these reasons, this recent environment only reinforces our beliefs in a value-oriented investment approach. While the style of “value” is not always posted atop the leader board of performance, we believe that the combination of diversification across market sectors and a disciplined eye for opportunistic buying and selling will help us and our clients pursue success.

* American Association of Individual Investors (AAII) Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of AAII membership on a weekly basis.

The Standard & Poor's 500 Index is a capitalization-weighted index that is generally considered representative of the U.S. large capitalization market.  

Diversification (or asset allocation) does not ensure a profit or protect against loss. 

Past performance is no guarantee of future results.

Volatility – a familiar friend comes calling in early 2015

The hyper-concentrated stock market of 2014 has left the building.  After the first quarter of 2015, we find ourselves living with a noisy new roommate from out of town.  Meet our friend, volatility.

While the market's newest guest lacks the decorum of 2014, it's not a new visitor.  Volatility has “crashed” here many times.  As always, we know it leaves some investors confused, fearful, and tempted to call the front desk for a room upgrade.  For our part, we welcome volatility with a hearty embrace.

As we have noted in the past, our value-oriented investment strategy considers volatility more friend than foe.  We don't enjoy inflicting uncertainty on our clients, but we know volatility brings with it fertile price swings that can fuel potential opportunities for patient opportunists.  We believe that volatility, when correctly managed for the long term, can enhance our clients' financial outcomes rather than threaten them.

But volatility can be a fickle fellow with a variety of clever disguises.  It's important to recognize one type from another, so here are a few timely examples:

Restless radicals:  Commodities are renown for unexpected price swings.  For the leader in current volatility, look no further than the corner gas pump. Since last summer's price crash began, oil prices have fallen nearly 60%.  A barrel of crude was marked below $49 as of mid-March.  A short-lived rally in February stalled, and many analysts are saying the bottom remains to be seen.  While this creates a windfall when filling up the family SUV, we also will be looking for high-quality investments in the price-deflated energy sector during this window.

Bruised blue chips:  Most of us yearn for the days when mainstay growth stocks were cheap.  The fact is, even the prized stalwarts suffer setbacks during volatile times.  Several of the largest tech stocks have repeatedly seen their value decline by 25% or more over the last decade.  When big brands get bruised, herd investors flee; value investors often buy.

Strong, silent types:  Quality isn't always flashy.  Many of the trusted, well-managed companies we monitor go about their business with little fanfare. Some of the companies are in the pharmaceutical, construction, and automotive industries, where investors need to look further into the future than this week's news cycle to recognize opportunity.  Because of this, valuations can fall in the near term due to shortsightedness, or just plain boredom.  We often find that a healthy level of value lives here.

As we make our way toward mid-2015, we again want to remind our clients that volatility is a fuel just as potent as that cheap gallon of unleaded we just bought at the self-serve pump.  Investors who run with the momentum-induced herd tend to view volatility as little more than downside risk.  And too often they see risk as a four-letter word that translates into lost capital, shortfalls in education funding, or postponed retirement plans.

In our view, volatility simply means a bumpier pattern of change in market values – downs and ups that can generate both risk and return.  With risk comes potential opportunity for intelligent entry into quality stocks.  Our aim is to recognize the value of the bumps rather than pretending we can avoid them entirely.  In doing so, we are confident in our ability to grow and preserve capital over time while helping to ensure our clients' goals and dreams become more – not less – secure.

Past performance is no guarantee of future results. 

The risk of loss in trading commodities and futures can be substantial.  You should therefore carefully consider whether such trading is suitable for you in light of your financial condition.  The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you.  The use of leverage can lead to large losses as well as gains.

Objects in the rearview mirror are not exactly as they appear

In December, Fortune.com published an article titled “2014:  The Year That Nothing Worked.”  It captured brilliantly how active mutual fund managers were failing to keep up with the major indices, such as the S&P 500 (up 13.7% for 2014 including dividends) and the Dow Jones Industrial Average (up 10% including dividends).  In short, 2014 was the worst year for active money managers relative to the market in three decades.*

By looking at these market indices, investors might assume their personal portfolio should be up by similar double digits as well.  However, that may not be the case.  Most of the market's performance was heavily concentrated in just a handful of companies, so those stocks accounted for a significant portion of the market's gains.*  We are very conscious of risk, so we don't take big bets on a narrow handful of companies. It's simply not what we do.

In recent years, many investors have opted to simply buy the holdings of the S&P 500 Index since the index has outperformed many active managers.  As a result, cash flows to these types of funds have increased dramatically.  After all, many investors, rather than adhering to a strategy, gravitate naturally to what has “worked.” 

This momentum-driven behavior frequently takes hold in the markets, whether it involves index funds, tech stocks, or any other popularized investment type.  However, betting on recent winners can become harmful whenever people feel a false sense of “safety” with their focus on past performance.  Our longtime clients know that we don't trust the rearview mirror when it comes to investing.  They also know we get uncomfortable when we see a crowd swinging too much in one direction. 

On the surface, index investing may look like a low-risk, passive strategy, but it's no silver bullet. Consider that investors who put their money in an S&P 500 index vehicle in 2000 lost more than 45% of their portfolio value from peak to trough, and it took them 13 years to fully recover.  During the same period, skilled active managers were able to create valuable wealth by finding attractive opportunities.**  

What about the future?  We concentrate on time-tested, value-driven principals.  In our view, there is nothing that replaces the process of a human brain applying in-depth analysis.  We will continue to put our confidence in research and discipline rather than chasing what happened last year or last quarter. 

In fact, since the market's performance during 2014 was concentrated in so few companies, many opportunities seem to have been overlooked and appear to be selling at attractive valuations.  If you think of the market as a pendulum, it has swung toward a narrower and narrower group of leaders.  In time, the pendulum returns to the middle ground.  We believe some of these overlooked high-quality stocks may become a valuable source of returns in the future.  The stocks that held us back in the second half may be the stocks that lead to strong performance going forward.  Over time, successful investors will always go through periods of outperformance and underperformance.  The key to our long-term success is our willingness to stick to our value discipline. 

So instead of watching every move of an index, we encourage you to stay focused on your desired goals: retirement, financial security, business opportunity, college plans, and travel dreams.  These are life's tangible destinations, and they mean more to you -- and to us -- than data points of a market index. 

*Fortune.com

2014:  The year that nothing worked

12/24/14

**Minneapolis Portfolio Management Group

Market Summary

Walking on This Ice

October 2014

Let's face it.  Everyone in the investment universe has an agenda.  Stock analysts want their recommendations to get noticed.  Web sites want page views, clicks, and ad revenue.  The talking heads on TV want the anchor chair or a book deal.  Publishers want subscribers.  So, as an investor, you have to constantly ask one key question:  Should their agenda influence mine?

As we enter the fourth quarter, the noisy winds that influence market sentiment are blowing like a November squall.  Market dips in July and September are described either as overdue corrections or pauses in a rebuilding process, depending who you ask.  Geopolitical risk is staging an ugly and troubling parade in every ring of the global circus:  Ukraine, Syria, Iraq, Iran, Gaza, and Africa.  The so-called “wall of worry” has no shortage of new and frightening bricks being added daily.

The soundtrack of distraction also plays loudly in financial circles.  Fed-watchers speculate about the timing and magnitude of an interest rate ramp-up (aka tapering).  The divergent performance of large stocks (up) and small stocks (down) raises debate about the maturity of the current growth cycle.

All the noise causes sentiment-driven swings in markets.  We can expect to see some of these swings during upcoming quarters.  But the ultimate questions are:  Should these market swings cause you to act?  How will the emotions of the moment affect your decisions as an investor?

We believe none of this noise should change your agenda as an investor.  Nor will it change our mission as we help you manage your wealth.  Whatever sort of noise arises, we adhere to a simple rule:  We focus on value by watching for out-of-favor pockets in the market.  Whether bulls or bears are leading the charge, we look for companies with promising revenue streams, discounted prices, stable management, and potential that the herd may have overlooked.  We see ourselves as equal part bargain hunters and guardians against inappropriate risk.  And we see potholes as opportunities.

Similarly, we urge our clients to put their agendas first.  We want you to stand with us, above the noise and apart from the herd.  If your priorities involve a comfortable retirement, security for family members, a reliable income stream, or a steadily growing portfolio, those desires and outcomes should become your benchmarks for decision-making.

If you have cash sitting complacently under your mattress, buried in your back yard, or as part of an investment account, ask yourself whether it should be put to work as part of your investment agenda.  If you are one of those that favor bonds over stocks because of risk factors, ask whether that plan is lined up with your agenda.  If you have been waiting for a cooling-off period in order to invest more fully in the growth of well-positioned companies, ask whether you are ready to view a market dip as a reason to seek opportunity.  We stand ready to help you through all of these questions.

Above all, if you are allowing a very noisy marketplace to affect your decisions, attitudes, or actions as an investor, ask yourself what's more important:  your agenda or that of the herd?

As the fall winds blow, please let us know if you would like to discuss or update your investment plans.  We believe our price-aware approach can help our clients make meaningful strides toward pursuing their goals in this environment. That's our agenda!

“This is just the first step on a long way.  We cannot lean back and be complacent.”  Wolfgang Bernhard

With the end of the second quarter comes the official start of summer. For some it's time for travel, boating, golf, or maybe just a backyard nap.  In the Pacific Northwest, we reclaim temporary bragging rights for the best climate in the land, at least until Labor Day.

As summer takes hold, we are not taking our eye off the ball.  We have enjoyed a relatively mild and steady stock market during the first half of 2014, so it's tempting to think that we, as investors, might relax.  But we don't dare become complacent at this stage.  Yes, stocks reached record highs in June (S&P 500 at 1,957), and portfolios have benefited from healthy, fairly broad-based performance.  Better yet, some investors have remained wary, so ownership of stocks is lighter than we typically see during periods of economic growth.  This is potentially good news in that additional capital could enter the markets, which can exert upward force on prices and, in turn, investor sentiment.

On the other hand, our world economic climate is not exactly sunny and 72 degrees.  Iraq is falling back into tribal violence.  Gas prices have jumped past the bewitching level of $4 per gallon.  The truth-or-dare foreign policies of Russia and China are more stressful than any peace-loving diplomat wants.  The Federal Reserve (Fed) and other central banks must at some point be brave enough to move away from prolonged zero-interest monetary policy.  To paraphrase our respected Stifel strategist, Barry B. Bannister*, the riddle for investors is whether the Fed's policies will create enough “escape velocity” to pull us out definitively from the 2008/2009 financial crisis.

As value-oriented investors, what do we do when the stock market is a productive place, but the world around us appears fraught with risk and uncertainty?  Frankly, this is when our job becomes both challenging and stimulating.

When asset values are healthy, we have to look harder to find the best opportunities.  We have to be ready to respond quickly to market setbacks or dips that might put stocks in our target-price range.  The intrinsic value of companies is worth watching, especially when risk is so real.  We have to remind ourselves that value investing is often rewarded in an environment when interest rates are likely to rise. And we have to remind our investors that owning bonds is less about investment performance and more about the ballast needed to offset turbulence.

Looking forward, some strategists see the S&P 500 slipping from the 1,950 range to the 1,850 range by fall.  But they also admit we could see the market keep chugging along if we see strong wages, modest inflation, and market acceptance of the Fed's move to slowly increase interest rates.  The other bellwether indicators to watch are Gross Domestic Product (GDP) growth, corporate earnings reports, and the stamina of our housing market recovery. Together, these factors will pull or push the market during the second half of this year, and we will be watching intently.

So go ahead, enjoy the summer.  But don't let a low volatility investment market cause you to become a complacent investor.  It's a great time to check in with us about your financial priorities and investment goals.  Easy-going markets provide investors with an ideal opportunity for level-headed planning.

* Barry B. Bannister, CFA, from the June 8, 2014 Stifel Market Commentary Letter.

The Standard & Poor's 500 Index (S&P 500) is a capitalization-weighted index that is generally considered representative of the U.S. large capitalization market.  

Climate change?  Looking for windows of opportunity in 2014

Have you ever enjoyed a lively stroll along the beaches of the Pacific Northwest, only to turn around and discover that your fleet-footed performance was benefiting from the wind at your back?

As investors, we should pause to take a breath at the start of 2014.  For the past year, the markets jogged along at a pace that few Wall Street pundits predicted.  The most optimistic strategists predicted 10-12%, yet by most measurements, the U.S. stock market had doubled those predictions by late December 2013.  As it turns out, investors enjoyed a remarkably sunny climate last year, with low interest rates, stabilized economic growth, and a re-energized manufacturing sector.  Our own value-focused investment strategies were rewarded for having stayed the course while investing in select buying opportunities along the way.

As we look forward to 2014, we expect both stocks and interest rates to grind upward, but both at modest pace.  The policymakers at the Federal Reserve have shown they will be cautious in any efforts to taper the government's monetary support, allowing investors to rationalize the fact that interest rates are likely to inch upward during the years ahead.  

So, here are our reminders to help you prepare for both opportunity and uncertainty during the upcoming year:

Valuation is still vital - Stock prices are relatively high as of year-end, so buying must be done very carefully, and selling must be done based on achievement of targets and specific goals.  Many strategists are saying that this year's market must now validate some of the price appreciation that already occurred in late 2013.  All of this will require a sharp eye for quality opportunities and an investment strategy based on discipline rather than emotion. 

Volatility is still opportunity - Choppy markets are likely to return in 2014, and while that may create some discomfort for some investors, it also creates windows of opportunity.  We actually prefer some degree of volatility because it allows for selective investment in companies that have strong underlying fundamentals – characteristics that are being overlooked temporarily by the mass market.

Economic growth still has room to run - The global economy continues to put the Great Recession in its rearview mirror.  Consumers are willing to spend on durable and consumer goods, such as automobiles, home appliances, and technology gadgets.  The global manufacturing index is climbing, an indication that suppliers are selling more goods to manufacturers.  Unemployment in the U.S. dropped to 7% last November, continuing a healthy descent from 7.9% a year earlier.  Home buying and building trends are returning to normal and even robust levels in some markets.  Global indicators such as German auto sales and Japanese heavy construction both showed encouraging rebounds in the second half of 2013.

In general, we like the beneficial economic trajectory we saw at year's end.  In 2014, we see more room for modest growth and selective opportunities in the year ahead, even if economic uncertainties, market volatility, and geo-political unknowns are part of the picture.  We continue to believe in and practice our value-oriented approach.  If you have questions or new planning issues this year, please don't hesitate to contact us directly. 

The times they are a changing – or are they?

Some things change quickly – look outside at the rain gauge and the gray skies compared to just a month ago. Other things change slowly, or not at all – look at the ideological stalemate in Congress and the questions surrounding our economic dependency on the Federal Reserve Board (Fed) fiscal policy. When it comes to investing, we must decide which changes affect our goals, and which are merely annoying distractions. As we enter the final stretch of 2013, our attitude toward the markets remains largely unchanged. We continue to fend off distractions while watching closely for opportunities in the less popularized corners of the market.

Here are some of the current winds of change we must evaluate when trying to separate real shifts from bothersome noise:

The Tailwinds

The markets, in general, continue to prove resilient by showing a generally improving trend, although a volatile ride at every turn. Investors are gradually regaining confidence, but many continue to hold tight to the exit rail for fear of getting caught in another severe downdraft.

• Strong rebounds in auto sales and a healthier housing industry are contributing to investors' willingness to stay the course.

• Improved fiscal reforms in Europe have created stability and a perception that economic contagion is less of a threat. 

• The Fed surprised everyone in late September by not pulling back on their asset-purchase program, a non-change that caused stocks to reach new highs, at least temporarily.  On the surface, this conservative decision was positive for markets, but it also shows that policymakers see the economic recovery as delicate and dependent on fiscal support.   

• Slower tapering by the Fed supports a continued commitment to stocks, and vlaue stocks in particular, as a strong compoone of our investors' asset alocation.  This also has created an environment where interst rates are controlled and, therefore, high-yield bonds are winning renewed support.

• Investor appetite for risk and a belief in traditional investment planning practices has gradually returned to more normal levels as investors realize that they must take on some degree of risk in order to pursue retirement goals and other asset growth objectives.   

The Headwinds

Nothing comes easily or risk-free in this market environment. Uncertainty exists around every corner, and those looking for tranquility might consider investing in a new sofa rather than market-priced stocks and bonds. Some degree of uncomfortable volatility is the price of admission for any goal-driven investment strategy these days.

• Geopolicitcal conflict and unclear regime changes are brewing on multiple fronts, and U.S. policy is no quick remedy for the troubling issues in Syria, Egypt, Norht Korea, and other extremist regions.

• Declines in unemployment are being generated mostly by lower participation rates (demographic shifts) rather than real jobs growth, so it remains to be seen whether our economy will truly generate sustainable new jobs for jobless workers.

• The partisan political divide in the U.S. remains dysfunctional; so don't expect effective policymaking in Washinton, DC anytime soon.  Governance by partisan threat has become the norm.  

• Both interest rates and inflation remain in check, but the Fed is left wondering when the economy will be able to wean itself from the parental supervision of asset-purchase policies.  

Overall, we see these changes creating a net-positive picture as we head toward year-end 2013. We believe the market rally will be longer and stronger than others expect. But we are also quite certain that volatility and short-term erosion of market strength will be a part of the trend for the foreseeable future. The latter means we will continue to recommend maintaining healthy cash reserves to enable opportunistic value purchases during sudden price declines.

We believe our clients are positioned correctly to serve their financial interests for both the near and long term. If you have any questions or would like to address specific year-end planning issues before the busy holiday season arrives, we welcome a more detailed conversation.