Quarter                    Year

S&P 500                                  9. 0%                    28.9%
DJIA                                        6. 0%                    22.3%
NASDAQ                                12.2%                    35.2%

For the first time in a decade, U.S. Large Cap Value outperformed. During the quarter, there was tremendous rotation from growth to value as investors seemed concerned about overall market valuation and sought less expensive stocks.

So where do we go from here? Many prognosticators seem worried that the market has moved too far too fast, and that significant weakness may be in our near future. However, data suggests otherwise. Historically, very good years are usually followed by good years.  Since 1950, there have been 18 of those very good years defined as up 20% or more. Of the 18 very good years, the market was up the following year 15 times with an average gain of 11.2%, much of the gain coming in the fourth quarter which was up all 18 times.

Also, since 1949, Presidential election years have averaged positive returns generally. When there is an open field running for President, the market has averaged a small loss by the end of the year. But, when the election includes the sitting (incumbent) President running, the market has averaged double digit returns.

There will be a pullback or two at some point this year. When we suffer a scary moment, we encourage investors to maintain calm. The market indeed does not go straight up. A good example is last year. Though we finished 2019 at an all-time high, there were times that tested our resolve. Starting May 3^rd, the S&P 500 lost 7.4% over the next 31 days. However, it fully recovered from that weakness in just 17 days ending June 20th. Again starting on July 26th, the market uptrend reversed, and it went down 6.7%. Though it took longer this time, the market fully recovered from the drawdown by October 28th. In the midst of this second period of weakness, there was a pullback of 5.5%, which the market fully recovered from in just 22 days. Getting out of the market during one of these times of weakness, would have been a decision that created future opportunity cost.

We remain bullish intermediate and longer term. The market and economic fundamentals remain good, and even seem to be improving. Valuations are a couple of points higher than “normal”, but low interest rates and a higher growth rate usually support higher price to earnings ratios. With stable interest rates and trade tensions easing, we still believe this long bull market has more upside.

Happy New Year! Thank you for your continued confidence and trust. Subscribe to Latest News on our website where we post mid-quarter updates.

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The recent China trade meeting was short on detail. However, the market was relieved to know that at least talks were continuing. As of this writing, there is news today of the potential for a signed trade deal with China at the Asia-Pacific Economic Cooperation (APEC) meeting which concludes in November. There is also news about a Brexit extension until the end of January next year. These positive news events, not to mention the successful terrorist raid by the United States this past weekend, have the market poised to open at a new all-time high today.

Though the news on China trade is welcome, the market fundamentals had already pushed the market to near highs. Corporate earnings for the third quarter have been good with a high percentage of companies beating on both the bottom-line (Earnings per share) and the top-line (Revenue growth). This week will be key as more than 140 S&P500 companies will report their earnings.

We continue to believe that China trade and Brexit will be background noise soon. That along with a more dovish Fed should propel the market higher as the fundamental outlook still looks good. With low interest rates, solid corporate earnings that are reasonably valued, and plenty of liquidity that can come to the market; we remain bullish intermediate to longer term.

We are entering November and December which have historically been two of the best months for the market. We believe last year’s 4^th quarter was an aberration based on overly pessimistic concerns about global growth. We believe economic output will remain strong for the foreseeable future and do not see evidence that a recession is on the horizon anytime soon.

We do expect volatility to persist from time to time, but believe patience will continue to be rewarded during any short term periods of weakness.

As always, we thank you for your trust and confidence. Subscribe to Latest News on our website so you receive any mid-quarter updates that we post.

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In our June 3rd market commentary we wrote, “The market may still have a little more downside, but we view the recent action as longer term opportunity rather than a reason for deeper concern. We expect the current uncertainties to fade over time and expect an oversold bounce soon.” And bounce it did. The market rally continued throughout June and the S&P500 was up about 6.9% for the month. This was the best June performance since 1955 (64 years). The Dow Jones Industrial Average jumped 7.2% posting the best June since 1938 (81 years).

The rally has continued in July as expectations of a Fed interest rate cut are high and odds are currently in favor of more than one rate cut this year. Uncertainty related to China trade has also faded for now as talks have restarted after the G-20 meeting in late June.

The key going forward will be corporate earnings this quarter, corporate earnings guidance looking forward and signs that the worldwide economic slowdown has bottomed. As we are writing this, the S&P500 has traded to a new intraday high and has pierced the 3000 level for the first time. Significant levels like this often create psychological resistance for the market short term, but we remain bullish intermediate to longer term.

A lot has been written about the age of this bull market and the length of the recovery and yes, recessions are a normal part of the economic cycle. That said, market fundamentals remain constructive and point to the potential for further upside. This recovery may be one of the longest if not the longest on record depending on one’s point of view. However, it is different in that it has also been one of the slowest growth recoveries on record as well. Inflation has remained tame, consumer confidence remains high, and we still do not see the valuation excess that could indicate the bear is coming out of hibernation.

Enjoy your summer!

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The volatility we saw during this time definitely tested investor resolve. That is why we reminded our clients last quarter, “When this happens, it is important to remember that the fundamentals always win in time.” The missed opportunity can be as devastating as the loss itself when we make emotional decisions.

During the 1^st quarter 2019, many of the uncertainties were proven to be just that. The Fed has become more dovish, and interest rate hikes are not expected the balance of the year. Growth may have slowed a bit but we are still growing nonetheless.  Trade policy is less of a distraction, in fact, a China trade deal is expected relatively soon.  We are starting to see economic recovery in Europe, and in the emerging markets including China. Corporate earnings growth will likely be better than the tamped down expectations.

Fundamentally the domestic economy is still strong.  In recent years, economic growth in the 1^st quarter of the year has been subdued, but has accelerated the balance of the year. We expect this trend to continue and remain intermediate to longer term bullish. Subscribe to the Latest News section of royalfundmanagement.com for further updates and mid-quarter commentary.

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We added market commentary to the Latest News section of the website during the quarter to help make sense of what was happening and to calm nerves. On October 24th we wrote, “Emotional decisions during times like this have always created a huge loss of opportunity over time. Market drawdowns are a normal process of a bull market. It is never fun, but important to remember, the average length of time for a full recovery is fairly short. In other words, stay the course. Be patient or ignore it if you have to, but do not panic.”

On December 10th we wrote, “We are testing the October lows and if it holds we could see the typical V-bottom and a strong rally off the lows.” We did end up going lower at that time, but we have again witnessed the typical V-bottom that always happens when there is too much fear in the market. From the low of December 24th until today, the S&P500 has rallied 12.4%, and the NASDAQ is about 14% off the lows. This is why emotional decisions can be so painful. For investors, having an intermediate to longer term investment horizon, it has always been beneficial to avoid emotional decisions and think of a market correction as an opportunity rather than a reason to panic. Market corrections are a normal process in the context of a bull market. Investors that sell often miss the rally that forms the V-bottom off the correction low.

So where from here? It is not unusual to see the market recover 50-60% of the losses very quickly, like it has this month, only to see more weakness to test the recent bottom. We believe the short term market bottom is in for a few reasons. First, we saw a level of fear that historically signals we are at or near the bottom. The volatility index (fear index) rose to nearly 40. Money was flowing out of stocks and into Treasury Bonds, and gold was rising. This is often referred to as a “flight to quality.” The Put-Call ratio reached record bearish levels. The Put-Call ratio has long been viewed as an indicator of investor sentiment. As a contrarian indicator, when fear is high and investors start to “throw in the towel”, that is usually a good sign that the market has reached the correction low and is about to turn.

In December we also wrote, “This is one of those times when the fundamentals are completely being ignored as the market is trending more on the technical picture and the news of the day.” When this happens, it is important to remember that fundamentals always win in time. Corporate earnings are still growing. Slower growth yes but that is to be expected after the initial benefit of tax reform wanes. The market is valued at less than average historical valuation as if earnings growth was going to be zero in 2019. There are still some headwinds. Does the Fed pause the tightening cycle? Is there resolution to the trade concerns soon? However, fundamentally the domestic economy is still strong. Volatility may remain elevated for a while, but we remain bullish intermediate to longer term.

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During the last market correction, the market shed over 10% in value and made a low on February 9th. There were a couple of recovery attempts and then a successful test of the lows was made in early April. Since then, the market has made a series of higher highs and higher lows and the S&P 500 finally made a new high again in August.

Over the last few days, there has been some weakness that culminated in today’s big sell off. The last time the market had this much of a sell off in a single day was eight months ago. Reading between the lines, if the last time we saw this type of one day carnage was eight months ago, isn’t it is interesting that we just came off a new market high inside of the past three weeks? In other words, this too shall pass.

Let’s put it into perspective.

The underlying fundamentals are sound and, the fundamentals always win. For example:

• Corporate earnings growth should exceed 20% this quarter for the third quarter in a row.
• Gross Domestic Product (GDP) shows the economy is finally growing north of 3% a year and should be sustainable.
• We have the lowest unemployment since 1969. That is right, 50 years.
• Consumer confidence readings have reached a record high.
• There is an extremely low probability of a recession on the horizon.
• There is positive earnings growth and valuations are not excessive.
• Interest rates are expected rise some but for good reason. The economy is doing well.

Corrections are a normal process in a bull market. Though it can be scary, it is usually healthy to get some profit taking and to retrench a bit to better sustain the next move up. The key is not to let human emotions get in the way. Studies show that human reaction, to bad or good news, is to overreact. This emotional reaction causes illogical investment decisions which, looking back, nearly always prove to be just that, emotional decisions.

We believe the fear of higher interest rates is overdone. The market and economy can handle higher interest rates for now. Inflation remains tame and unless interest rates and inflation rise to a point where economic activity is restrained, the market will do fine.

We believe this bull market is intact and any pause here should be thought of as an opportunity, not a time for general concern. Expect corporate earnings to be good and seasonable tendencies for the market become more favorable from now to year end. The market may go lower first, but we remain intermediate and longer term bullish. We continue to expect that patience will be rewarded.

It has been said that bull markets do not die of old age. As long as the underlying fundamentals are strong, the market will go higher over time. The baseball playoffs are here. Which inning is this bull market in? Worst case, the seventh inning stretch, but we believe this bull market is far from the ninth inning. Stay tuned.

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While the large company S&P500 and DJIA indices have yet to fully recover from the first quarter market correction, the Nasdaq Composite and the Russel 2000 have made new highs. Though there have been many market headwinds recently, the rise of the US Dollar and the concern over trade tariffs has caused the small cap stocks to outperform. This is due to the fact that smaller domestic companies are not affected by the rising dollar or trade tariffs to the extent that larger companies that export and/or have business overseas are. We believe it is just a matter of time before the larger companies in the S&P500 and DJIA gain traction and make new highs too.

Well, enough of the technical jargon. Fundamentals always win and the underlying fundamentals remain quite strong. Corporate earnings were nothing short of spectacular in the first quarter and are expected to continue to grow the balance of this year. With earnings growing and stocks generally at historically average valuations, based on earnings, we believe the bull market remains alive. Yes, interest rates may rise a bit but that is only because the economy is accelerating. There are some forecast for the economic output (GDP) to be 4% in the second quarter. It has been a news driven market recently though. One day the market is down due to trade tensions and the next day it is up for another reason or the perspective that an actual trade war will not happen. In our opinion, every other country needs American consumption so cooler heads will prevail in time and the intermediate and longer term outlook still looks quite compelling.

As we approach earnings season and companies begin to announce their second quarter numbers, we again expect the market to regain its focus on the fundamentals. The international trade tensions and other market moving geopolitical news will again become background noise. There are some that point to an earnings slowdown and that may be true. However, no one expected that corporate earnings could grow at the amazing pace of last year or especially the first quarter this year. When you hear concern over peak earnings, it does not mean that earnings are not continuing to grow. It just means the pace of growth may have slowed. With reasonable valuations, as long as earnings are still moving in the right direction, it should propel stocks higher over time. You do not get a bear market until you see a period of extreme excess. We would argue that we are a long way from that phase in the market.

The markets were up for the second quarter led by the small cap indices and we continue to believe the bulls will maintain control. 2018 will continue to be more volatile than the last couple of years. However, focus on the intermediate to longer term and we believe our clients will be rewarded. The short term dips will be bought and we believe this bull, though it caught a cold earlier in the year, is alive and well. Stay tuned.

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Well, ten days after the last Quarterly Market Update, the market reached the high to date and the first overdue correction was upon us.  Starting on January 29^th, the market fell sharply to the current correction low of February 9^th.  From the intraday high on January 26^th to the intraday low on February 9^th, the S&P500 lost 11.8%. Corrections are always fast and furious as fear and emotions rule the day. Corrections definitely test investor fortitude. In the first quarter, we put two memos on the Latest News section of our website to communicate our thoughts. We encourage you to subscribe to Latest News so you will automatically receive an email anytime we post to it.

In these memos and now, we remind you that we believe patience will be rewarded again and that emotional decisions are almost always proven wrong in hindsight. Corrections are a normal process within a longer term bull market. Keep in mind that during this bull market we have had twelve 5-10% pullbacks since 2009 and yet the market recovered each time and made new highs within a relatively short period of time. Let’s look at the last time the market fell over 10% as an example. In January 2016, the DJIA lost almost 13% in just three weeks. It fully recovered by the end of March just a couple of months later. It is also interesting to note that the DJIA low during that correction was 15451 but now, as of this writing, it is trading over 24500. Emotional decisions at that time would have been extremely costly in terms of opportunity cost. Once again, we strongly believe patience will be rewarded this time too.

Uncertainty versus fundamentals: The market does not like uncertainty and there is a lot of head wind right now. We have been faced with an unwinding of volatility derivative trades, trade tariffs and the threat of a trade war and recently, the attack on the technology sector which had provided market leadership. Over time however, fundamentals always win. Underlying market fundamentals remain good and in fact are improving. Corporate earnings are expected to grow in 2018 even significantly more than last year and corporate cash flow is strong. Signs are that economic growth is simultaneously accelerating domestically and worldwide. We believe that the economic and corporate earnings power provided by tax reform is underestimated and that trade tariff sabre rattling will abate in time.

Some stats based on the strong start to the year: When January is up, the market has ended the year higher 86.8% of the time since 1950. When January is up at least 4% as it was this year, the market has ended the year in the green 100% of the time. When the DJIA ends a year up 25% or more, the market ends the next year higher 8 out of 10 times with an average gain of 12.6%. We recently have made what appears to be a successful test of the February low and believe the market bulls will regain control soon. Stay patient and stay tuned for further updates.

Royal Fund Management, LLC

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*The Dow Jones Industrial Average (DJIA) had less than a 1% intraday move for 95% of    trading sessions.
*The DJIA closed at record highs 71 times in 2017.
*The S&P 500 was up every month of 2017 and ended the year up a record 14                    consecutive up months.
*The S&P 500 has not had as much as a 3% pullback since November of 2016. This              stretch is much longer than the previous record which was set in 1995.

A normal “backing and filling”, profit taking correction will happen. The question is always from what level. We continue to advise that as long as the big picture fundamentals do not change, a correction will actually be healthy longer term. An opportunity, not a reason to panic.

Last quarter we wrote, “we would argue that the risk of a market melt up could be more of an issue.”  One of the reasons we thought the market may get ahead of itself was meaningful legislation getting through Congress.  Well tax reform is here. Some market analyst believe tax reform could add as much as $12 to $15 to S&P 500 earnings. This would be about an 8% gain all other things being equal. The DJIA was up 10.33% during the 4^th quarter and, even on top of that, has risen 4.2% year to date post tax reform. That is the best 10-day start for a year since 2003 when it gained 5.9%.

We believe the market is still adjusting to expectations as to how tax reform will affect the bottom line of corporate America. However, all systems seem to be “go” anyway as S&P 500 profits are expected to have risen 11.2% in the 4^th quarter 2017. And, for the first time since 2011, all market sectors should post an increase in both revenues and earnings per share.

The S&P 500 and Nasdaq have only closed down once each so far this year and, there is obviously a tremendous amount of momentum. Generally, when a year ends with the amount of momentum shown at the end of 2017, the market will advance again the following year. So, a “melt up?” We do not think so and, we believe the risk to the rally is small when compared to the economic growth we are experiencing.

Interest rates are rising. The 10-year US Treasury bond is at 2.55%, the highest since March of last year and the 2-year breached 2% for the first time since late 2008. Many would argue that the market cannot continue up as rates rise and that, in fact, there is an inverse relationship. Higher interest rates are a sign of better economic conditions which is positive for earnings growth. Inflation and interest rates are not negative for the market until they reach a level that curtails economic activity. We believe that situation is still far off.

Though the recent velocity of the market does cause us to be cautiously optimistic short term, we remain intermediate to longer term bullish as the underlying fundamentals are not only stable but, improving. Look for mid-quarter updates on our website under the Latest News section.  Stay warm this winter!

Royal Fund Management, LLC

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So when is the next correction coming? We have had over 243 trading days without even a 3% drawdown which is a new record for the market. Last week for the first time in twenty years, the S&P 500 closed at a new record high all five days. Bull markets often continue to surprise to the upside. Thus the clichés “don’t fight the tape” or, “the trend is your friend.” Another interesting statistic; The S&P 500 was up, on a total return basis, each of the first 9 months of 2017. This was last achieved in 1995. With a few days left in October, the odds are favoring 10 for 10. We will not try to time, trade or avoid a correction. As long as the big picture fundamentals do not change, any looming correction should be viewed as an opportunity rather than a reason for concern.

In fact, we would argue that the risk of a market melt up could be more of an issue. There are a couple of situations that could simply push the market ahead of itself. One , there are times when skeptical investors just throw in the towel and buy the market adding, short term, a significant amount of liquidity. Two, expectations are very low that any meaningful legislation gets through Congress. A successful vote on tax reform for example, could propel the market too quickly. Markets do not make big moves based on expectations but, on any significant variance from expectations. A market melt up could add volatility as the “where we go from here” becomes cloudy and harder to predict.

The belief that the market rally has been too narrow has been quickly dismissed recently. Some believe the market has been driven by too few sectors or individual names however, the small cap Russell 2000 Index rallied in the 3^rd quarter from flat lined for the year around August 21^st to up 11.48% YTD as of yesterday. This rally of about 11% in just a couple of months is a positive indication the market advanced has broadened which is further evidence of a healthy market.

We remain bullish intermediate to longer term. Short term we will view any overdue correction as healthy believing that patience during that time will be rewarded again. The flow of major 3^rd quarter earnings reports continue to be stronger than expected. Growing earnings which are not excessively priced, low interest rates and plenty of fuel (liquidity) for the market are the underlying fundamentals that provide us some assurance this bull market still has the energy it needs to prosper.  Stay tuned!

Royal Fund Management, LLC

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