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Q2 2018 Market Commentary

Recently, the phrase “Goldilocks economy” has made the rounds in the financial press to describe the state of
economic conditions in the US and elsewhere. This phrase, first coined in the early 90’s to describe the market
environment at that time, is used to imply a set of circumstances that are “just right” for growth – inflation that
is not too high nor too low, employment that is not too slack nor too tight, consumers and investors that are
optimistic (but not too optimistic).

And into this Goldilocks scenario comes a US tax reform package that will be a boon to corporations’ bottom
line, despite a forced repatriation of corporate profits. The latter point will certainly boost capital investment to
some degree - but for the most part these repatriated profits, and the tax savings on them, will benefit investors
directly in the form of higher dividends and increased stock buy-back programs.

So, with an economic backdrop that almost uniformly positive, and the promise of even more cash on the books
for US corporations (many of which are already holding record levels of cash) why does it feel like stock
investors are on the edge of panic every other week or so?

Part of the reason, as we’ve mentioned in recent messages, is that most investors are simply unaccustomed to
seeing any volatility in price action at all. The market has, for some time, marched gradually higher with very
little interruption. In fact, the S&P 500 index didn’t see a decline, or a gain, of more than 2% on any single
trading day throughout 2017. Most recently, through January, gains nearly doubled declines to set new record
highs seemingly every other day. Goldilocks indeed!

Certainly, some of the angst could be caused by the simple fact that, since January, the market has seen more
volatility in prices than it has in over a year. That is disconcerting in and of itself and can cause investors to be
even more sensitive to price swings. That becomes a self-feeding cycle – to the downside, but also sometimes
to the upside as well, as buyers crowd in to “buy the dip” in record time. That is why you may see the market
open up deep in the red, and finish the day with solid, across the board gains – and vice versa.

This daily up and down might typically go unnoticed, unless it is exacerbated, or perhaps initiated, by what is
happening in the news. As market gyrations become a part of the overall news cycle for the day, it can
sometimes feel like the world is teetering on the brink of some kind of penultimate event. A catastrophe that
will end our way of life; or a breakthrough, that will fundamentally change how we live?

Of course, the news that seems to be having the most effect on markets right now is the potential for
disruptions in foreign policy. The impact is particularly acute when the issue relates to trade, and mainly our
relationship with China. This makes sense, as the two countries represent the largest trading partners to nearly
every other nation and so the results of any shift in policy will have implications for a number of companies all at
once, in a number of industries.

The particulars of each industry’s concern are varied, and often overlap due to the increasingly inter-connected
nature of our economies. We could spend a bit of time here dissecting the ins and outs of our trade
relationships, and the details of the progress and reversals made so far in the latest round of “negotiations.” But

Securities and Investment Advice offered through Registered Representatives of Cambridge Investment Research, Member FINRA/SIPC. Investor Advisor
Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor. Financial Planning Services through Northstar Financial
Companies, Inc., a Registered Investment Advisor. NFC and Cambridge not affiliated.
international trade is far too complex to adequately explain in the context of a market commentary, so suffice it
to say that the current “trade war” is still just a war of words.

Despite the escalation in rhetoric, not much as actually changed in regard to the way in which the world trades.
Exchange rates have been relatively stable in the midst of the stock market reaction, and that is a good
indication that this trade war is still being waged primarily in the press.

Bond markets, too, seemed to have ignored the jabs being exchanged as there has been only the slightest shift
in foreign yields, relative to US Treasuries. But even that shift is likely in response to the steady tightening of US
monetary policy, rather than a threat to global trade.

In fact, a steady rise in global rates may be one reason why stocks have trouble shaking off headline shocks.
Fears of inflation, stoked through a new perceived hawkishness at the Fed and coupled with fiscal stimulus
measures during an expansion, have become de rigueur again.

To compensate, some investors have made big bets on securities that will pay off in a rising rate environment –
floating rate debt, for instance, or commodities such as Gold or Oil that typically do well when during
inflationary episodes. And bond prices have been falling, even as the stock market vacillates, pushing yields up.

But the rise in rates has been distinctly uneven – 2-Year Treasury notes are rising faster than 10-Year notes – and
all new issuances have been shorter in duration, resulting in a flattening yield curve. This is often seen as a sign
of impending recession, because a concentration in short-term bonds suggests the market believes rates will be
lower for longer.

A flattening yield curve, then, directly contradicts inflation fears and can result in losses for those investors
trying to hedge against rising rates. But fears of a recession, with the commensurate drop in stock prices, can
result in losses for traditional portfolios as well.

Ultimately, interest rate changes can either indicate a recession, or runaway inflation – but they can’t be
pointing to both at once. Unfortunately, that contradiction doesn’t matter to a news cycle that marks every tick
of the 10-Year Treasury as a momentous occasion. That impulse, to not only report but also explain (and thus
sensationalize, since most explanations of our financial structures are kind of boring, really) transforms the
subject of interest rate policy into yet another headline shock.

Nor does that contradiction matter to a set of computer models that are programmed to trade according to a
very specific set of conditions. Such models are still incapable of understanding the full context of any given
market shift – nor are they capable of making judgements about the longer-term impacts, or even the veracity,
of any given piece of news. Combine sensationalism with a hair-trigger computer model, and you have a recipe
for sizable swings in the market in very short periods.

Headline risk has always been a real issue and not all news is negative. Individual stocks, in particular, are prone
to not only excessive selling in reaction to some bit of news, but also excessive buying. It so happens that the
recent series of headlines have been decidedly negative.

The most recent noteworthy reports include the announcement of a very steep penalty for fraudulent activity at
Wells Fargo, manipulated drug trial data at AbbVie, and of course an egregious lack of data security at Facebook.
Such headlines, and the issues they uncover, are often serious – but historically most companies are able to

Securities and Investment Advice offered through Registered Representatives of Cambridge Investment Research, Member FINRA/SIPC. Investor Advisor
Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor. Financial Planning Services through Northstar Financial
Companies, Inc., a Registered Investment Advisor. NFC and Cambridge not affiliated.
rectify their problems and move past them, at which point investors can again evaluate the firm based on its
potential for future earnings.

We know that sweeping headlines about policy or politics can influence the stock prices for entire industries –
ruminations of war in the Middle East can kick off a rally in Oil stocks, for example. But more and more, the
confluence of ever present news feeds, computer trading and index investing are causing the same industry
wide reactions to company specific headlines, too.

The reaction in Wells Fargo’s stock price to publication of their fine was exactly what you might expect (the price
plummeted) but what is interesting is that other bank stocks all fell in tandem. The beloved FANG stocks are still
unable to find their footing after one of their own came under fire for their cavalier handling of their user’s
personal information – despite solid growth in revenue for every other member of that group. These industry-
wide reactions are evidence of algorithms and indexing under the influence of a ridiculously short and ever-
present news cycle – take the next bit of information, magnify it (across a set of stocks, in this case) and set off
in a direction. Rinse and repeat.

Good news rarely makes for good headlines – even back when headlines appeared on the front page of a
newspaper. Now, waiting a whole day for the next headline is untenable, and so we end up with a string of
worrisome stories and ominous narratives. Is it really any wonder that investors are jittery despite a very
favorable economic backdrop? Investors have a lot of reasons to be permanently pessimistic, even in the face of
improving earnings and bigger profits for the companies they hold.

And just like Goldilocks, who eventually gets roused out of a comfortable nap in a “just right” bed by a family of
angry bears, investors have been roused out of their comfortable positions in the “just right” stock market by a
string of bearish headlines. And like the little girl in the story, many will feel compelled to flee the market
completely when in reality the “just right” thing to do is stick with their long-term plan.

Should you have any questions or comments regarding this Commentary please feel free to email me or Julia
Randall at steve@nstarfinco.com and julia@nstarfinco.com respectively or call us at (800)220-2161.

Steven B Girard

President

The opinions expressed are those of LongView Wealth Management and are based on information believed to be from reliable sources, however the
accuracy and completeness of any information cannot be guaranteed. Any mention of publicly traded corporations is for illustrative purposes only and not
intended as a recommendation to buy, sell or hold any security. Diversification and asset allocation strategies do not assure profit or protect against loss,
and past performance is no guarantee of future results.

Securities and Investment Advice offered through Registered Representatives of Cambridge Investment Research, Member FINRA/SIPC. Investor Advisor
Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor. Financial Planning Services through Northstar Financial
Companies, Inc., a Registered Investment Advisor. NFC and Cambridge not affiliated.