Dear Client: The year 2016 is now in the books and what a year it was for both the U.S. bond and stock markets. The year was progressing in rather calm fashion through November 4 with the stock market (S&P 500) up just over 2% and interest rates sliding throughout the year from 2.25% (10 year US Treasury bond) to 1.35% around the start of the summer. There was more concern about the economy slipping into recession and mild deflation than anything else. Economic growth was anemic and interest rates around the world were falling, in some countries to 0% or below. Then wham! It happened. The November 4 election changed everything when every major poll had the results going the other way. We talked in our newsletter dated December 2015 about the stock market being fully valued based on earnings and fundamentals and how we expected 2016 to be a tepid year for stock market returns. We were looking fairly prescient until November 4! Since then the stock market has gained about 10% and interest rates have gone up by a full percentage point. Whether any of us liked the candidates in the race or how the results panned out a few things are abundantly clear. The upturn in interest rates that started in July was an indication the Wall Street and the markets were beginning to anticipate a strengthening in the economy above and beyond what we have been witnessing since the economy bottomed in 2009. The election results threw fuel on the fire. The incoming administration campaigned on cutting corporate and personal income taxes, easing red tape and regulations, reversing or retooling Obamacare, and investing billions in our country’s neglected and crumbling infrastructure. This is music to the market’s ears. Anything that reduces taxes and amps up the country’s growth rate will lead to increases in corporate earnings. Over longer periods of time corporate earnings growth drives stock prices. The downside of the surprising election result is that we are all flying blind to some degree until enough time passes to determine if all of these new initiatives actually get passed and if so, what the ramifications will actually look like. The stock market is acting like everything mentioned above is a done deal when the President elect hasn’t even moved into the White House yet. Certain industry groups have appreciated strongly in the past 2 months while others have been left completely behind. The banks have performed particularly well closely followed by industrial stocks, the former because of potentially reduced regulation and the latter due to potentially stronger economic growth. Utilities, health care and consumer staples stocks have largely been left behind. You go to the doctor and go grocery shopping irrespective of what the economy is doing or where interest rates are at any given minute. Actually, that is what has made these industry groups such good performers over many years. These groups don’t rely on the economy to grow their earnings. As long as the population grows and folks continue to live longer, these guys should do just fine. On the contrary, recent year’s tepid economic growth has been a good back drop for the financial markets. Corporate earnings have grown enough to keep stocks on an upward trajectory while interest rates have remained at historically low levels. Low interest rates have made houses and automobiles more affordable while providing little to no competition for stocks. Going into your bank to find you can only get a percent or so interest on a CD is not likely to make you go out and sell your stocks. Bump that CD Rate up to 5% or 6% and things start to get interesting. In conclusion, we don’t want the economy to accelerate too quickly, at the risk of pushing inflation and interest rates up faster than anticipated. That would be the recipe for the Federal Reserve to clamp down on the money flow in turn potentially causing the next economic downturn and bear market in common stocks. Given the aforementioned lack of visibility regarding government policy and the incoming administration, GSB Wealth’s affliction for high quality investments should serve us well in the months to come. We are currently looking, on the margin, to rotate out or reduce exposure to those investments that have logged strong gains since November 4 and reallocate to some of the sectors that have been left behind. The market is expecting corporate earnings growth to accelerate to 12% to 13% in 2017 and 2018. This would be a tall task and if it does pan out we might expect the stock market to do reasonably well in 2017. Should some of the policies of the new administration get watered down or strung out to future years, we may see a stock market pull back as a lot of positive expectations seem to already be built in. GSB Wealth will be closely assessing government policy as 2017 unfolds and will be making adjustments to client portfolios as necessary. Sincerely, the GSB Wealth Management Team

Newsletter October 2016

Dear client: We have now closed on the third quarter of 2016 and thought it would be a good time to revisit our investment management philosophy.

GSB Wealth Management’s Investment Philosophy:
The majority of our client portfolios will contain a mix of common stocks, fixed income, and cash. The weightings within these three major assets classes are determined by seven investment objectives, ranging from conservative to aggressive. Conservative objectives will normally have relatively high weightings in fixed income while aggressive objectives will lean heavily toward common stocks. Mutual funds may be utilized for specific strategies where we see added value and cannot replicate such strategies by purchasing individual securities. However, cognizant that utilization of mutual funds adds an additional layer of fees through the mutual fund’s internal management expense; we strive to employ only those mutual funds having no front or rear loads, no 12B-1 fees, and relatively low expense ratios. We believe that the majority of our clients, many of whom have already accumulated a substantial nest egg, are most interested in growing their assets when markets are in their up cycle, but more importantly preserving principal when markets are in their down cycle. As such, our first priority is preservation of capital.

Fixed Income Philosophy: We believe that fixed income investments are the anchor in a well- diversified portfolio. As such, we invest in high quality instruments with full faith that interest and principal will be paid on schedule in any economic environment. Portfolios will typically be invested in many different issuers and maturity dates to ensure thorough diversification. In today’s economic environment, we do not believe investors are being adequately compensated to invest in longer term fixed income instruments; hence most of our portfolios are short to intermediate term in nature. This is not to say we are averse to adding lower quality bonds to a portfolio when appropriate. An example was in 2008 and 2009 when the fixed income market went through an unprecedented period of volatility, not dissimilar to equities and the general economy. Many investment grade bonds depreciated in price as the economy went through extreme distress and the level of market fear was as high as any time in recent memory. Looking to take advantage of this fear, selected purchase of some of these affected investment grade bonds potentially allowed one to garner an above average yield to maturity, while also providing equity like returns as the bonds appreciated in value when market fear subsequently subsided.

Equity Philosophy: We believe that commons stocks are the primary growth engine for a diversified portfolio and should have some representation in most, if not all portfolios. Common stocks have outperformed most other asset classes over long periods of time as common stock ownership is essentially a call on the growth of earnings and/or dividends of the U.S. economy and other developed countries. Growth of principal via common stock ownership has also provided an effective hedge against the erosion of purchasing power over time by way of inflation. We believe in thorough diversification within the equity portion of a portfolio via ownership of 35 to 40 individual companies. We do not attempt to “index” our equity portfolios by mimicking the sector weightings of well- known indices such as the S&P 500 stock index. Such a strategy, while providing good theoretical diversification, will tend to shadow the performance of the market in good times as well as bad, such as 2008-2009. Instead, we are “bottom up” stock pickers, focusing on individual companies based on the quality of their franchise and future potential for earnings and dividend growth. We are, in essence, looking for companies with an “economic moat”, or those business characteristics that lead to the sustainability of a thriving franchise over time while limiting the ability of competitors to profitably enter or sustain themselves in the business. Identifying such companies is the first part of the exercise. The second part is determining the appropriate price to pay for franchises of this caliber. Our team’s long tenure in the investment management business has allowed us to develop purchase and sale disciplines based on the current valuation of a company and how that valuation compares to competitors in the same economic sector or other companies of similar quality. It is one thing to identify quality merchandise, and another ascertaining what to pay for it. We often look to “go against the grain” by purchasing quality companies when they are out of favor on Wall Street for reasons we deem as temporary. This often allows us to invest in a good franchise when it is temporarily selling for below intrinsic value. Many successful historic equity investments have been made by identifying quality franchises, then purchasing them when they are selling for below intrinsic value. As the company continues to grow, not only do we benefit from that growth but also from the valuation expansion that can happen as the stock once again becomes favored by the investment community. Our long term approach and bias to quality will in many cases result in a relatively low level of portfolio turnover, and as a result, the minimization of realized capital gains tax exposure. We encourage you to contact us should you have any questions or comments.

Sincerely, the GSB Wealth Management Team

APRIL 2016

Dear client:
Last quarter we wrote about how stock markets were rather boring in 2015 finishing the year relatively flat from January 1 of 2015. Welcome to 2016. The stock market started descending right out of the gate, dropping 10% to 12% by mid-February, only to come charging back finishing the first quarter slightly higher than where we were on January 1. For a time there in early February many were getting that sinking feeling “here we go again”. We advised to stay the course and maintain calm as the domestic economy appeared to be on good footing and that the slowdown in China and overseas economies was likely to be contained. So here we are on April 1 with markets on solid ground and investors once again thinking “everything is going to be alright”. We have to admit it would have been nice to end the quarter up 1% to 2% without all of the drama in between. Unfortunately it doesn’t work that way. These periodic dips and shakeouts are healthy for the markets, flushing out speculation and those investors that are “faint of heart”, if you will.

Much has changed in the past few months and some of it for the better. We spoke in earlier letters about the weakening of the stock market’s internal dynamics, where a handful of stocks were going up whereas the majority of stocks were in a downtrend. The market plunge in January and early February alleviated this situation to some degree. Many stocks are still 20% or more below their respective 2015 highs, but the market as a whole has been advancing in a healthy manner. The U.S. economy continues to trudge along in modest growth mode. This isn’t an entirely bad situation, though many wish growth would notch up to a higher gear. Notching the economy up to a higher gear would likely produce some unwanted side effects. Namely the Federal Reserve pushing short term interest rates higher in an effort to control inflation. This usually is a phenomenon that precedes economic recessions, something none of us wants to see with the meltdown of 2008-2009 still fresh in mind. Inflation remains well contained and energy prices seem to have found a bottom. Many analysts feel that a barrel of oil needs to stabilize in the $50-$60 per barrel range. Below that and many energy companies will eventually face insolvency; above that and the price of a gallon of gas heads back above $3. Another positive for corporate earnings growth is that the appreciation of the U.S. dollar against the currencies of our competitors is slowing. We spoke earlier about how restrained corporate earnings have been because the U.S. dollar has been so strong. As this reverses, our domestic companies that sell products overseas will get a boost to their earnings, perhaps dramatically so as the dollar appreciated rapidly over the past few years. This in itself could be a huge swing as what was formerly a large drag on earnings now becomes a tailwind.

To summarize, GSB Wealth Management’s view is that current fundamentals are pretty solid and should this continue, we may expect the stock market to finish the year with solid gains, meaning 5% to 10% upside from present levels. Clearly there are manifold variables that could throw cold water on our thought process, the first being the upcoming presidential election. We have all been amused (should we say disappointed) with the rhetoric and conduct exhibited by our presumed November candidates. Hopefully once the primaries are over the electees will calm down and actually lay out their plans of what they hope to accomplish and how they plan to get there. Other variables include the economies and currencies of our global partners and competitors. Instability in these areas can lead to instability on our shores, even if it is more psychological than actual, as we recently witness in January and February.