Last year the economy and the markets performed well in part due to the fact that the economy is in the midst of an enduring economic expansion. Now with some new fiscal stimulus in the form of comprehensive tax cuts passed by Congress the expansion received an additional boost to extend its life. This provided there are no unfortunate consequential mis-steps by the Administration and Congress in terms of trade (NAFTA, TPP) or foreign relations (Iran, Korea, China). Although the Republicans have, for now, forsaken their historical misplaced concerns regarding balancing the budget, it is unknown when or if they will return to their dogma. This uncertainty greatly reduces the prospects for any sizeable infrastructure rebuild package in the near future.

The Federal Reserve has been quite transparent and explicit in its desire to continue to normalize (or raise) interest rates and to reverse their years of Quantitative Easing by selling its massive portfolio of bonds and Treasury holdings. Although rising interest rates are usually not good for markets, they continue to perform well on the strength of the economy and the benefits of tax cuts. In the absence of any meaningful signs of inflation, the Fed continues to push ahead with its policy agenda in an attempt to be proactive against prospective inflationary risks. In response, the markets have gradually begun to nudge long-term interest rates higher, further mitigating the known economic risks of a flattening or inverting yield curve.

Although recent monetary and fiscal policy actions point to continued economic expansion, we are becoming increasingly nervous that the markets have risen more than that which is warranted. A correction in coming months is a distinct possibility. If the markets continue to rise aggressively, we may begin to make additional portfolio adjustments in response.

We remain, however, cautious and vigilant. Please also remember that because these quarterly thumbnail sketches are very brief, do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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