The quantitative easing measures put into place by

crisis now are in the process of being unwound. Most observers believe that the Fed has a long way to go before interest rates are back to what most would consider normal levels. Nevertheless, the rather nominal changes made to date by the Federal Open Market Committee (FOMC) have been accompanied by a growing sense of unease on the part of equity and bond traders alike.

There is an enduring school of thought that rising interest rates inevitably lead to lower stock prices. While the history of interest rates dates back thousands of years, similar data on stock indexes…notably what is now the Standard & Poor’s 500… begins in 1950. Our study of that (almost) 70-year period discerned a number of instances when the inverse relationship between interest rates and stock prices was apparent. However, and most importantly, in most periods since 1950 the movement of interest rates had little or no effect upon stock prices.

Consider the decade of the 1950’s when stocks were beginning their long term uptrend. Bond yields rose year after year, including in 1954 which was the year when stocks hurdled over their 1929 highs. During the immediate post-2000 years, the abysmal performance of the stock market had virtually nothing to do with interest rates which also were declining. Even more recently, one can point to the bond and stock experiences of 2013 when the yield on the 10-year Treasury surged from under 2% to peak at the 3% level. Equity

investors ignored that potentially negative factor as stocks closed the year +29.6%.

Despite the lack of consistency in the theory that rising interest rates are followed by declining stock prices, investors should anticipate that many

Given that possibility, Herold’s associates have some investing solutions that should mitigate the impact from a continued rise in interest rates. First of all, one should be aware of the fact that yields on money market funds have risen from the 0% level to above 1% currently. Should bond rates continue to move higher, so too will the rates on money market instruments. Also, for conservative investors, floating rate securities provide an

are adjusted regularly based on the movement of

having an emphasis on companies achieving growth in earnings and dividends will perform well under most market scenarios.

Sincerely,

Larry HeroldPresident

IN THIS ISSUE

P2 A Different Year

A Different Outcome

P3 The Clouds Have

Parted for The

Financial Stocks

P4 Estate Planning:

Without A Will

There Is No Way!

Interest Rates: Bells Are Ringing!

THE BERNARD HEROLD & CO., INC. newsletter

INVESTMENTS ADVISORY INSURANCE

Q22018

Background Photo: Federal Reserve Bank, Washington DC

Twelve months ago, investors were looking back at what had been a stellar performance for the stock market during the 1st quarter of 2017. The Dow Jones Industrial Average had risen 4.6% for the quarter but performance results made for even better reading when the S & P 500 (+5.5%) and NASDAQ Composite (+9.8%) were included.

and traders-investors were startled by a spike in volatility coupled with a reversal in the upward trend for stock prices. For the quarter as a whole, the DJIA posted a loss of 2.5% with only 8 of the 30 stocks in that composite registering a gain. Because of their weightings in technology issues, the S & P 500 declined only 1.2% while the NASDAQ Composite actually held on to a gain of 2.3%. Perhaps the only consolation to be derived from these unimpressive numbers is the fact that the performance of most overseas stock markets was even worse than our own.

The bond market provided no cover for equity-averse investors. In March the Fed raised short-term interest rates by ¼ of 1%, and that change took its toll on

all bond prices. Also, it is worth noting that municipal bonds fared worse than their taxable equivalents. Moreover, high-yielding equities, such as REITs, Utilities and Telecom Services, were among the poorest performers during the quarter.

Although the overall stock market recovered nicely during the early weeks of April, the averages ended virtually unchanged for the month as a whole. The S & P 500 rose 0.3% in April while the NASDAQ added less than 0.1% to its value. The only positive surprises were provided by Energy companies where higher oil prices were levered into stronger earnings results than had been forecast.

First quarter earnings typically are published in April. Most S & P 500 companies have now reported their results and 78% of them have exceeded analysts' projections. Despite that impressive performance, investor responses were, for the most part, much less enthusiastic than in earlier years. Price:Earnings Ratios thus are declining from what had been a rather lofty level of 18.4X a year ago to less than 17X currently.

Going forward, geopolitical events such as the possible imposition of tariffs, the outcome from the upcoming meeting

if any, in the nuclear deal with Iran,

prices than earnings results. In the end, however, earnings growth and dividend increases should prove to be a winning combination.

A Different YearA Different Outcome

Q2 2018

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The Clouds Have PartedFor The Financial Stocks

THE BERNARD HEROLD & CO., INC. newsletter

Q2 2018

The Financial sector represented 14.7% of the S & P 500 at the end of Q1 2018. Only Information Technology, at 25% of the total index, exceeded the weighting of the Financial sector. In addition to money center and regional banks, the sector includes asset managers, brokerage

lenders, insurance companies and so on.

Despite the laundry list of services offered by the 68 separate companies that make up the Financial sector, we note that 8 of the top 10 weighted companies

Money center and regional banks account for about 45% of the overall weighting of the sector (50% if Goldman Sachs and Morgan Stanley are included). Only four non-bank entities…Berkshire Hathaway, American Express, Charles Schwab and BlackRock…account for a meaningful percentage of the whole sector. Said another way, except perhaps for Berkshire Hathaway (11% of the total Financial composite), the revenues/earnings/stock price movements of the banking industry guide the action-reaction of the Financial sector relative to the overall S & P 500.

Most U. S. banks have come a long way

The average return on equity was over 13% during the 1st quarter. That return was achieved on an average equity-to-risk asset ratio that was more than three times higher than the level that existed

turmoil. For the year as a whole, analysts are projecting earnings growth on the order of 27% vs. an overall S & P gain of 18.4%. Only the Energy companies, whose earnings are recovering from severely depressed levels, are expected to outpace the Financials.

Lower tax rates are only one factor impelling the net income growth of the banking industry. The leap in stock trading volatility during the 1st quarter resulted in a sharp rise in equity trading revenue for the banks. While loan growth has been sluggish year-to-date, demand should increase as the economy continues to rise. Also, any further increases in short-term interest rates should be additive to their bottom line.

Notwithstanding the positive outlook for bank earnings and dividends, investors seem to have shrugged off the prospects for the group. The Financial sector underperformed the market for March and April as well as for the year to date. It could be argued that the sky for the Financial sector is not all blue. Regulatory issues, including levies for past transgressions by certain banks, still are a factor to contend with. However, this risk is moderating in terms of frequency and magnitude. Also, as loan activity rises, loss ratios likely will rise. Nevertheless, we detect a “spring in the step” of many bank entities.

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THE BERNARD HEROLD & CO., INC. newsletter

Achieving your

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LARRY HEROLD

New York, NY 10022Tel: 212-371-3950

MARIO GIAMMARCO

1190 Hylan Blvd.Staten Island, NY 10305

New York, NY 10022

The new federal tax law only negatively impacts estates in excess of $22 million. One of the goals in preparing the “perfect will” is to avoid the need for probate. Just what is probate? It is the legal process that includes the

court, identifying and inventorying the property involved, paying off all legal debts, and so on. The creation of some sort of trust is one approach that lawyers employ to avoid probate. However, there are so many trust options, all of which require greater knowledge of the subject than most of us can muster. Thus it is advisable to seek legal counsel before going through the tedious motions of preparing a will.

Thanks to the likes of Amazon, Costco and other warehouse outlets, most people have ample goods on hand to provide for their daily needs well into the future. In contrast, a 2016 Gallup poll revealed that less than one-half of American families have written a

high priority.

In preparing to write a will, there are a few basics to keep in mind. First of all, a listing of

Also, naming an executor…admittedly a somewhat thankless task for the nominee…is an essential facet of all wills. Finally, and most importantly, retaining an advisor likely helps to avoid many of the pitfalls associated with the creation of any legal document.

Estate Planning: Without A WillThere Is No Way!