February 2018
Market Update
(all values as of 03.29.2024)

Stock Indices:

Dow Jones 39,807
S&P 500 5,254
Nasdaq 16,379

Bond Sector Yields:

2 Yr Treasury 4.59%
10 Yr Treasury 4.20%
10 Yr Municipal 2.52%
High Yield 7.44%

YTD Market Returns:

Dow Jones 5.62%
S&P 500 10.16%
Nasdaq 9.11%
MSCI-Europe 4.60%
MSCI-Pacific 5.82%
MSCI-Emg Mkt 1.90%
US Agg Bond -0.78%
US Corp Bond -0.40%
US Gov’t Bond -0.72%

Commodity Prices:

Gold 2,254
Silver 25.10
Oil (WTI) 83.12


Dollar / Euro 1.08
Dollar / Pound 1.26
Yen / Dollar 151.35
Canadian /Dollar 0.73

Manager’s Comments – Feb 23, 2018

Long-forgotten market volatility is back! With renewed concerns about inflation and rising deficits, bonds have been selling off causing interest rates to rise rapidly and significantly. In turn, this has caused stock investors to book profits and re-evaluate acceptable valuations and expectations. Add to this mix some uncertainty over future Fed and fiscal policies and the net result is greater volatility … or a return to “normalcy.” In other words, equity markets are acting fairly rational, even though the severe swings of late appear emotional. The challenge is in determining whether this rapid rise in rates will be short-lived or sustainable.

From January 1st, the S&P 500 Index quickly rose 7% to a record close in late January, then plunged 10% over a 10-day period, only to be followed by a rebound of nearly 5% before calming down somewhat over the past week. Even though some of these recent gyrations were very likely fueled by large program trades and various leveraged products, that does not mean that the resulting adjustments have been unwarranted or overdone. In fact, it is probable that recent behavior will persist. I view this recent Correction as “a shot across the bow.” When interest rates are on the move or if there is great uncertainty over their direction, stock prices rarely go unaffected, particularly when they are richly-valued. At this time, it is simply too soon to determine how high rates are headed or how fast they will continue moving.

Interest rates should reflect some reasonable premium over inflation. Thus far, higher wages have not crept into the standard consumer inflation gauges. As well, healthcare and housing costs are rising slowly, energy costs are stable and even producer input costs are under control. Therefore, I don’t anticipate runaway interest rates, but rather a slow and measured rise. As an example, the current 10-Year Treasury yield is 2.9%. While this is near a multi-year high, it is low by historical standards and it does represent an adequate premium to the current inflation rate. And Fed Policy while not irrelevant, will follow the course of market interest rates. The Fed now has the cover to push their policy rates toward market rates without spooking the markets – but in a reactionary mode, not yet preemptive.

In addition to interest rates, other indicators also point to solid but not exaggerated economic conditions. US employment and regional manufacturing indices are positive and still indicate expansion. The Index of Leading Economic Indicators is still rising, and global conditions are also strengthening. Europe’s composite purchasing manager’s index hit a 12-year high in January. And according to the Organization of Economic Cooperation and Development, the percentage of countries that increased their exports hit a record high in 2017 with the trajectory still pointing north.

In fact, every major world economy is simultaneously growing (most are expanding) according to the Wall Street Journal. Given that roughly 50% of revenue earned by companies in the S&P 500 Index derive overseas, the outlook for corporate profitability continues to improve. Zacks Investment Research, Inc. reports that 70% of the companies in the S&P 500 Index have reported their Q4-2017 results and within this group, total earnings are up almost 15% and revenues are up over 9% from Q4-2016. Expectations for 2018 are even greater despite a consensus outlook of modestly higher interest rates.

The recent correction has not materially altered any strategies

Manager’s Comments Continued

However, as I’ve mentioned numerous times, stock prices don’t rise faster than earnings indefinitely. The recent correction proved that point. And when one takes into consideration an outlook for modestly higher interest rates, any expectation for significant stock appreciation is suspect. Earnings growth needs to remain strong in the face of rising rates to justify higher stock valuations which by many measures remain high overall.

Stock appeal varies among US sectors with Energy, Financial, Consumer, Industrial and Technology (to a lesser extent) still offering the best relative values. Various foreign markets also appear more reasonably valued than the overall US market. And if rates do continue their ascent, at some point income-oriented investments will show much greater appeal.

Although client risks had been pared somewhat going into the Correction, most portfolios have maintained full exposure to equities relative to their long-term targets. While it is impossible to accurately predict the timing of such events, all clients had been expecting both a correction and less generous stock gains going forward. This sober attitude is very reassuring as market volatility returns to normal levels.

Harvard Mountain Management’s client portfolios are goal-based as opposed to solely performance-based and no two are identical. Each client has unique spending needs, tax considerations, estate goals and opinions about risk. These factors influence the establishment of each client’s long-term portfolio strategies.

The recent correction has not materially altered any of these strategies nor has it reduced the viability of any client’s assets or spending capabilities. However, near-term portfolio tactics will be influenced as much by risk management as by long-term growth potential. In most situations, it won’t be until a probable shift in market direction (implying prolonged decline) occurs before long-term strategies are significantly revised. At present, no such shift seems necessary as I am cautiously optimistic toward the markets for all of 2018.

Paul Scheu, Manager



The Treasury Department plans to increase the size of its debt auctions by $42 billion

New IRS Tax Withholding Tables – Tax Planning

Because of the new tax law provisions this past month, 90% of wage earners will see an increase in their paychecks due to revised withholding rates, according to the administration. The effect of the revisions will be noticeable in early February, or as soon as employers adopt the new withholding tables, which are required to be in place no later than February 15th.

Withholding tables are used by payroll services and employers to determine how much tax to withhold on employee checks. The new tables reflect the increase in the standard deduction, repeal of personal exemptions and tax rate modifications.

According to the IRS, the new tables should produce more precise tax withholding, thus reducing overpayments that result in excessive tax refunds. The idea is to have just the right amount withheld, not too much and not too little. The IRS is also suggesting that form W-4 be revised to account for changes with itemized deductions, child tax credit, dependent credit, and repeal of dependent exemptions.

The IRS is also updating its withholding calculator on IRS.gov to reflect the new tables https://www.irs.gov/individuals/irs-withholding-calculator. (Source: IRS)



consumers are taking on more debt