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1 Charles Sherry Director, Institutional Education Group Blue Ocean Global Wealth 9841 Washingtonian Blvd., #200 Gaithersburg, MD Tel: January Financial Market Update January 31, 2017 The Waiting Game Much of the optimism over the last three months can be traced back to the themes that have been running since Election Day. It s a new administration that wants corporate tax cuts, individual tax reform, regulatory reform, higher defense spending, and a ramp-up in infrastructure spending. With the exception of new domestic outlays, the Trump administration is working with a sympathetic Congress. Yet, it s also an administration that has railed against globalism and has shunned large, multilateral trade deals. Markets like the former; they cast a wary eye on the latter. For now, it s not just investors that have warmed to the change in Washington and the perception that business-friendly legislation is just around the corner. First, let me state the obvious. The name Donald Trump elicits a myriad of reactions. Yet, surveys of consumer confidence have soared since the election, with the Consumer Confidence Index hitting its best reading in 15 years see Figure 1. Consumer Confidence Index Fig Jan-86 Jan-89 Jan-92 Jan-96 Jan-99 Jan-02 Data Sources: Conference Board, Polling Report, NBER Jan-05 Jan-08 Jan-11 Jan-14 Jan-17 Shaded areas mark recessions Last Date: Jan 2017

2 Moreover, a measure of small business confidence is at its highest level in over a decade (National Federation of Independent Businesses). One might say that the animal spirits that drive economic activity are stirring. Still, major proposals designed to create a more fertile ground for economic growth don t happen overnight. Washington moves slowly and competing interests can complicate matters. For example, talk of a border adjustment tax is a new wrinkle that just popped up on the horizon. But investors want a simple and clean cut in the corporate tax rate, dropping it from 35% to around 15-20%. In some respects, January has been an interim period a waiting period. It s one where investors have been trying to evaluate how the new administration will govern, what its priorities will be, and how it will move forward. Following a strong finish to 2016, we saw the upward momentum in shares slow through much of the month. However, the Dow did top 20,000 for the first time when Trump got back on message (at least from a market perspective), meeting with business leaders and signing executive orders designed to speed energy pipeline construction and pare back on what he sees as burdensome regulation. Index January Return* 2017 YTD Return % DJIA NASDAQ Composite S&P 500 Index FTSE Developed ex North America Index 4 Bond Yields Yield - % a/o Jan 31 & Change* Yield - % a/o Dec 30, month T-bill year Treasury year Treasury 2.45 Unch year Treasury Commodities Jan 31 Price, Monthly Change Year end 2016 Oil per barrel 5 $52.77 $ Gold per ounce 6 $1, $1, Sources: U.S. Treasury, MarketWatch, St. Louis Federal Reserve, CNBC * Monthly: December 30, 2016 January, Remember, it s the pro-growth message we heard in November that sparked the rally in shares. Still, Trump was not a conventional candidate, which was part of his appeal in some corners. And he has yet to shed his unorthodox ways. He s not shy about tweeting his opinion or ruffling feathers.

3 Some like the new style. Others abhor it. As your financial advisor and financial confidant, I m not here to offer opinions on his leadership, or use this space as a political platform. My goal is to discuss themes that are affecting shares in either a positive or negative fashion. It s to view what s happening through the narrow prism of an investor. I ll leave it to you to form your own conclusions regarding the broader aspect of his policy initiatives. President-elect to president Investors crave a fair degree of certainty. They want quick enactment of pro-growth policies. The rollout of his more controversial stances, including the restriction on immigration, created political uncertainty and some turbulence as the month came to a close. It not only raises fears that Trump may get sidetracked, but there are rising concerns the pro-business message heard in November and the laser-liker focus on taxes may end up taking a back seat to other proposals and squabbling among Congressional leaders. Given the impressive run-up since Election Day, short-term traders used the political uncertainty as an excuse to sell as the month came to a close. Long-term focus the fundamentals Longer term, it s really about profits and profit expectations, economic growth, and interest rates. The four-quarter earnings recession has ended, and earnings growth is forecast to accelerate and run above 10% in 2017 see Figure 2. You have to go all the way back to early 2011 to find four-straight quarters of double-digit profit growth (Thomson Reuters).

4 S&P 500 Earnings - Change from One-Year Ago Percent 15 Earnings Recession Fig Actual Forecast -10 Q1'14 Q3'14 Q1'15 Q3'15 Q1'16 Q3'16 Q1'17 Q3'17 Data Source: Thomson Reuters Last Date: Forecasts are subject to change Of course, earnings forecasts are subject to change given that there are plenty of moving parts in the earnings forecast equation, including U.S. and global economic performance and the dollar. Moreover, firms are posting profit margins that are near record levels (S&P Dow Jones Indices). An acceleration in wage growth would be welcome. So would a rise in business investment, but it would likely whittle away at margins. Of course, that would likely occur in response to faster economic growth, which is a tailwind for profits. As you can see with this simple example, forecasts rely on plenty of changing variables. Meanwhile, the economy continues to expand, and the Fed currently believes that gradual rate hikes are the most likely path. Volatility can t be ruled out. It is a natural part of investing. Risk can be managed but not eliminated. For now, the fundamentals are generally supportive of shares. 1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results. 2 The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly. Past performance does not guarantee future results. 3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results. 4 The FTSE Developed ex North America Index is an unmanaged index of large and mid-cap stocks providing coverage of developed markets, excluding the US and Canada. It cannot be invested into directly. Past performance does not guarantee future results. 5 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results. 6 London Bullion Market Association; gold fixing pricing; Prices can and do vary; past performance does not guarantee future results. It is important that you do not use this publication to request or authorize the purchase or sale of any security

5 or commodity, or to request any other transactions. Any such request, orders or instructions will not be accepted and will not be processed. All items discussed in this report are for informational purposes only, are not advice of any kind, and are not intended as a solicitation to buy, hold, or sell any securities. Nothing contained herein constitutes tax, legal, insurance, or investment advice. DISCLOSURE: Investing involves risk including the potential loss of principal. No strategy can assure success or protects against loss. Past performance is no guarantee of future results. Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Please note that rebalancing investments may cause investors to incur transaction costs and, when rebalancing a nonretirement account, taxable events will be created that may increase your tax liability. Rebalancing a portfolio cannot assure a profit or protect against a loss in any given market environment. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors. Non-U.S. securities markets involve possibly greater risk of political instability and greater currency risk in addition to having been more volatile. These risks can be accentuated in emerging markets. Commodities investments are speculative and involve special risks related to weather and international political and economic developments. Equity investments tend to be volatile and do not involve the guarantees associated with holding a bond to maturity. Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the portfolio. Tactical allocation may involve more frequent buying and selling of assets and will tend to general higher transaction cost. Investors should consider the tax consequences of moving positions more frequently. Beta measures a portfolio s volatility relative to its benchmark. A Beta greater than 1 suggests the portfolio has historically been more volatile than its benchmark. A Beta less than 1 suggests the portfolio has historically been less volatile than its benchmark. Past performance is not a guarantee of future performance. Different investments involve different degrees of risk, and there can be no assurance that the future performance of any investment, security, commodity or investment strategy that is referenced will be profitable or be suitable for your portfolio. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Before making any investments or making any type of investment decision, please consult with your financial advisor and determine how a security may fit into your investment portfolio, how a decision may affect your financial position and how it may impact your financial goals. All opinions are subject to change without notice in response to changing market and/or economic conditions. Copyright 2017

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