Our accounts performed well this year, again outperforming the major market indices. However, as with the indices, some of the large gains were the result of a sharp market recovery early this year following a sharp downturn late last year. The market quickly stabilized and continued its upward trend as the Fed successfully took strong measures during the year to avoid economic weakness in the face of the weakening manufacturing sector.

The current economic indicators show the economy continues to grow, that manufacturing remains modestly weak, but the service sector, housing sector and labor remain strong. The term structure of interest rates (the yield curve) is generally reflective of how the bond market views future growth. It indicates modest growth in the near term. The Fed now seems more attuned to the “new normal” and stands ready to respond as needed should disruptions occur. Given the fact that inflation over the past decade has been unable to achieve even the modest level of the Fed’s 2% target, this allows the Fed wide latitude with many tools and facilities to respond as needed to economic disruptions.

One lingering concern is that although the Fed has stopped lowering short-term interest rates, since last September it has been injecting substantial temporary liquidity into the banking system by means of overnight re-purchase agreements. It is unknown as of yet what caused this need, but it is clearly a new form of quantitative easing in response to some form of systemic stress. We are monitoring this situation closely.

We anticipate the U.S. economy will continue to grow modestly as several global risks seem to have abated. But persistent general economic stagnation in Europe and Asia remain a concern. The market will likely continue its recent upward trend given the ongoing earnings growth in the tech sector of the market. We remain cautious and vigilant. Please 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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