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Thoughts on the recent market pullback:

Although we take no declines lightly, it is important to keep in mind that the numbers have changed dramatically over the years. In other words, a 1300 point drop is not what it used to be. 1300 points to The Dow Jones, which has been above 25000, is approximately 5%. By no means a crisis at this point. Certainly not quite the same as the 550 point drop in 1987 that equated to virtually 23%.

The numbers have also been unusually deceiving this calendar year. While the news has been reporting record highs for the S&P 500, most diversified investors have been treading water. This has primarily been due to a small number of US equities that have represented most of the gains. In fact 10 stocks have contributed more than 100% of the S&P 500’s YTD return*, meaning, most of the market has already been having a weak year.

As we have noted many times, historically the S&P 500 experiences an average intra-year drop of 13.8%.** We have been overdue for some weakness.

Rising rates as well as tariff skirmishes have definitely been a concern. Although the economic data is strong, this does not necessarily translate into rising stock prices. Typically, the best time to buy is when the news is at its worst.

In our January 2018 newsletter, we pointed out that the potential reward following the gains of 2017 was reduced while the risk had been increased. This has really been the story for 2018, although much of the action has been beneath the surface.

While we certainly have more fun when the market is going straight up, the year-to-date activity has not changed our commitment to prudent long-term investment principles.

*Source: Factset Goldman Sachs Global Investment Research as of June 28, 2018
**Source: JP Morgan Q2018 Guide to the Markets

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