Mid Year Review Market Letter

July 13, 2018

Dear Valued Client:

The second quarter of 2018 is now officially closed, and with July 4th just past, it’s safe
to say the summer season is in full swing. While for many of us the main features of
July are cookouts and trips to the beach, this month also holds a special place in the
hearts of cycling fans worldwide, as it brings the sport’s most famous race, the Tour de
France. For those that are unfamiliar with the event, the Tour de France is one of
cycling’s three Grand Tours. Each July, 22 teams comprised of nearly 200 of the best
cyclists in the world, compete in the race, which spans 23 days and covers more than
2,000 miles. With 23 days of televised coverage, you’re likely to catch at least one of
the various stages of the race, and if you do, you’ll notice that riders tend to pack
together in groups the announcers call the “peloton.” Winners will pull ahead of the
peloton, while riders who struggle with the grueling pace or experience equipment
issues will lag behind.

This same principal can be applied to the markets, with the peloton represented by the
broad, capitalization-weighted market. As this large group of hundreds of stocks winds
its way around curves, through valleys and over mountains, many stocks will behave
quite similarly. However, there will be stocks and sectors that break away from the
pack for sustained periods of time, others that fall well behind the pack, and a few that
inevitably fall out of the race altogether. Our job as risk managers and tactical
investors is to identify the stocks, sectors, and asset classes that have the strength to
pedal beyond the comfortable confines of the peloton and avoid those that lag behind or fall out of the race.

One metric that has a history of providing a quantifiable, objective measure of
performance is price. Everyday stocks compete and the results of these competitions
are recorded. By recording the results of this daily competition, we can rank stocks,
sectors, and even asset classes by relative strength in order to develop an objective
picture of the market race as it develops, allowing us to see which areas are currently
leading, much like we can see the riders that are pulling ahead of the peloton and
those that are lagging behind. With that in mind, here are some of our observations
from the previous quarter:

• Domestic Equities continue to lead the major asset classes, with International
Equities in second place. However, the second quarter saw notable weakening in
the international space, most significantly in the emerging markets.

• From a size and style perspective, growth is favored across all three size
categories – large, small, and mid cap. Specifically, small cap growth strengthened
significantly during Q2 and now leads all size and style boxes.

• From a domestic sector perspective, the technology sector remains the most
significant long-term leadership trend within the market, despite volatility earlier
this year and questions about how trade tensions with China may affect the sector.
The energy sector has improved its standing more than any other this year, largely
thanks to rising crude oil prices. Two interest rate sensitive sectors, real estate
and utilities, have struggled and represent the laggards among US sectors today.

• As mentioned above, International Equities continues to sit in second place from a
broad asset class perspective; however, a strengthening dollar and geopolitical
uncertainties have contributed to notable weakening of the asset class.

• The five-, 10-, and 30-year U.S. Treasury yields have each receded from the highs
they established earlier this year, providing some relief for core domestic fixed
income which had been harmed by the rising rates of early 2018. It may be too
early to say that the trend in rising interest rates is over however, as the Fed has
given no indication that it will reduce its pace of short-term interest rate hikes.
Meanwhile, international bonds, which had provided a safe haven from rising US
interest rates, saw sharp declines over Q2, as the US dollar strengthened.
Convertible bonds, high yield municipals, and floating rate notes have been among
the few bright spots within fixed income.

As always, we will continue to monitor your portfolios, and make any necessary
changes as leadership changes within the market. If you would like to become more
familiar with my investment process and the tools I use to identify market leadership
across major asset classes and within asset classes, please contact me at your
convenience.

Sincerely,

David M. Gallagher

Wealth Manager

P.S. If you think this type of information would be of benefit to anyone you know,
please share this communication with them.

Please be aware that the content of this newsletter is based on the opinion of Dorsey,
Wright research and may differ from the research provided by your financial advisor.
This market theme letter was written by Dorsey, Wright & Associates and is provided
courtesy of your financial advisor.
Past performance is not indicative of future results and there is no assurance that any
forecasts mentioned in this report will be attained.
Stocks offer growth potential but are subject to market fluctuations. Dividends are not
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This market theme letter was written by Dorsey Wright & Associates and is provided
courtesy of your financial advisor.
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