Dear client:

2017 has turned out to be quite a year in the financial markets. We can think of few individuals who thought that the stock market (S&P 500) would return close to 20% when all were prognosticating in January of last year. We have to admit that GSB Wealth management was surprised as well but we are happy to take what we can get while we can get it. We have discussed in recent newsletters that the stock market seems fully valued, if not over valued yet there is nothing in the immediate future that looks to us to knock the market off of its perch. Many clients have called us with concern about recent goings on in Washington, threats from North Korea, the new tax bill, income inequality, and a myriad of other things reported in the daily news. In reality, these issues have little effect on the long-term health of the stock market and economy. What is reality is that the U.S. economy is picking up steam from the subpar growth trajectory we have been witnessing since the recovery began in 2009. Corporate earnings growth drives stock prices and earnings growth has been gaining momentum as interest rates remain at historically low levels. Should this continue in 2018, we may expect common stocks to log returns in line with the growth in corporate earnings, which would be a welcome sight coming off the solid gains witnessed in 2017. The strengthening economy is something we will be closely watching as stronger growth has the potential to start putting upward pressure on interest rates. We have been in a “goldilocks” economy for several years now. Not too hot nor too cold. Corporations have benefited greatly from low interest rates. Favorable borrowing costs have been a boost to earnings as firms refinance older high cost debt or borrow cheaply to invest in modern technology and new equipment. Low financing costs have also allowed companies to buy back their own stock, reducing shares outstanding to goose earnings growth. Finally, higher interest rates would give investors an alternative to owning stocks. Think back to 1987 leading up to the 22% drop in one day in October. The stock market had performed in a spectacular fashion through late summer and had become highly valued, as it is today. At the same time interest rates had been increasing and peaked with the 10-year Treasury Note hitting 10% by August. This in part contributed to the crash. Stocks now had serious competition in a 10% return from a guaranteed government bond. Such does not exist today but bears watching as the economy strengthens.

Changing direction, GSB Wealth Management intends to no longer distribute quarterly performance reports in the future, preferring to review such information on an ad hoc basis at client meetings or during periodic conference calls. Reporting quarterly seems to us to go against the very philosophy of GSB Wealth Management at its core. We structure client portfolios with a long-term view, taking each client’s risk tolerance into consideration and constructing portfolios with time tested securities of high quality. Constantly comparing against a particular index (and there are hundreds to choose from) doesn’t make sense to us and threatens to have one take his/her eyes off the ball or potentially change philosophy in order to chase an index that may have little resemblance to the securities in one’s own portfolio. We saw this happen in 1999 as many investors capitulated and bought into the internet stock craze in an effort to keep up with “the market”. Shortly thereafter the train went off the tracks and crashed. We made this decision only after careful consideration and thought, backed up by the thinking of Warren Buffet, John Bogle (founder of Vanguard) and other well renowned professionals in the investment management field. We will still have performance data at our fingertips at any given moment and are happy to share that data at any time and will do so on request. As always, we of course are open to your suggestions and/or concerns and encourage you to contact us at any time for further discussion. We hope you have a great New Year.

Your GSB Wealth Management Team

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