In a quarter where interest rates, inflation and the dollar all rose slightly and where the sounds of trade war drums could be heard, large U.S. growth company stocks led the way with a very strong quarter based on their 20+% profit growth over 2017.  Smaller stocks gained less, and bonds as well as foreign stocks were essentially flat.

Given these results, your portfolio performed well, and its present position clearly reflects current market conditions.  About half of this year’s profit growth for U.S. large stocks is coming from the large income tax cut they receive this year versus what they paid previously; that boost won’t occur again in 2019.  Large companies are, however, best-positioned for the global economy’s current challenges; this is why they represent nearly 60% of your total equity holdings.

U.S. small companies, ~15% of your equities, suffer more from rising interest rates since their debt levels tend to be higher.  They are still doing well and had a solid quarter – up over 3% – but did not outgain large company stocks as they did through June.

Foreign companies are also profitable – more than in 2017 when they out-performed U.S. stocks – but are the most harmed by a rising dollar and trade uncertainties.  They also trade at more attractive prices and benefit as the dollar slows its rise.  This is why ~25% of your equities are here, more than held by those who ignore market history and less than those who say valuation levels should outweigh U.S. economic strength.

Finally, rising interest rates always harm bonds.  This year, most have earned ~2% in interest but had their prices fall by 4%, a 2% overall decline.  By contrast, our exclusive use of short-term bonds in your portfolio has generated a small gain so far in 2018.

For now, the biggest risk to recent years’ gains is that the U.S. economy overheats, pushing inflation and interest rates to levels that impact consumer spending, confidence and corporate profits.  This is where our rebalancing helps and why your overall equity allocation is about one-tenth lower than it otherwise would be.

Thank you, as always, for the continuing opportunity to work with you and – though it seems far too early to say, our best wishes for healthy and happy upcoming holidays!