L a n e A s s e t M a n age m e n t

July 17, 2017

Stock Market Commentary

Market Summary The S&P 500 gained about 9.2%,

Over the last two years, the S&P 500 has gained nearly 16%, most of
which occurred in the months following the U.S. election. While
Europe and Emerging Markets largely paralleled the S&P 500 through
last April, they have outperformed the S&P 500 since. U.S. investment
grade corporate bonds have been largely flat over the last 12 months
while gold and oil have declined. Not shown, the U.S. dollar rose for
the fist six months only to fall back in the most recent 6 months to a
level a bit below where it was a year ago (a good outcome for exports).
International equities gained about 14.8% with Asia (ex Japan)
and Mexico leading the way,
Gold rose about 7.5% while the dollar fell about 6.7%, and
The 10-year U.S.Treasury rate fell about 14 b.p. to about 2.31%
contributing to a 4.2% increase in investment grade corporate
bonds.
For the U.S., significant events over the quarter were:

Since the beginning of the year through June 30th: The unemployment rate continued its downward path, falling to
its lowest value since May 2007

The charts on the following pages use mostly exchange-traded funds (ETFs) rather than market indexes since indexes cannot be invested in directly nor do they typically reflect the to-
tal return that comes from reinvested dividends. The ETFs are chosen to be as close as possible to the performance of the indexes while representing a realistic investment opportu-
nity. Prospectuses for these ETFs can be found with an internet search on their symbol. Past performance is no guarantee of future results.
 L a n e A s s e t M a n age m e n t Page 2
Stock Market Commentary

Business confidence remains high following a brief drop-off in April
and May
Housing starts slipped following a strong first quarter; the 6-month
moving average remains well below a long term average.
The Third (and final) Estimate of Q1/2017 real GDP was 1.4%,
down from 2.1% in Q4/2016. A drop in personal consumption ex-
penditures and private inventories was offset somewhat by an im-
provement in net exports supported by a falling dollar. Somewhat
worrisome, with a per-capita adjustment, the increase was 0.8%
and slipping further below its long term trend.

The University of Michigans consumer sentiment index remains

high though at its lowest reading in 7 months.

I believe the outlook for Q2 real GDP could be much more favor-
able, perhaps twice Q1 (near 3%) on account of a rebound in con-
sumer spending and inventories. Once reflected, however, GDP
growth is likely to slip back to the 2% neighborhood.
For Europe, industrial production increased 4% year-over-year while
the composite purchasing managers index slipped slightly contrib-
uting to strong performance for Eurozone equities as shown on page
1. (The Composite PMI for the U.S. recovered from its lowest read-
ing in 6 months last quarter.)
** *** **
 L a n e A s s e t M a n age m e n t
Stock Market Commentary
Market Outlook
For U.S. equities, I believe the near term outlook will continue to be
driven as much as anything by corporate earnings reports. In that re-
gard, an interesting analysis is provided by FactSet showing corporate
earnings estimates for the S&P 500 against the actual growth for the
last 12 quarters. In each case, the actual results were better than an-
ticipated. Whats encouraging is that the current estimate for
Q2/2017 is for about a 6.6% gain. If the past is prologue (something
that should never be counted upon), we could be in store for close to a
double digit gain in the second quarter.
Page 3
On a longer term basis, I expect the U.S. equity market will be
largely driven by the content of Trumps fiscal and trade policy pro-
posals, once they become known and likely to pass. At the moment,
expectations have been lowered but I suspect that Trump will try
hard to get some form of market-friendly tax reform done before
the end of the year and possibly sooner.
As for interest rates, there are so many crosswinds and factors that
influence the direction that it is next to impossible to forecast where
they will be in the near future. With the Fed prepared to increase
the Fed funds rate and begin to reduce its balance sheet as the year
progresses, even that can be delayed depending on emerging hard
economic data here and abroad.
International equities also have crosswinds to contend with. On the
one hand, market fundamentals have been improving, as mentioned.
On the other, revised attitudes toward international trade add more
than a small amount of uncertainty.
All things considered, the technical outlook remains positive al-
though showing some current signs of weakness. On the plus side,
we have the potential for positive earnings surprises while, on the
other hand, we have a market that has benefitted from rising valua-
tion and corporate buy-backs. While a correction should not come
as a surprise, its timing cannot be predicted.
** *** **
 L a n e A s s e t M a n age m e n t Page 4
Market Valuation

Is the market overvalued? Well, if overvalued implies a situation where something is wrong and is overdue for a correction, Im not so sure.
What I am sure of is that the market is richly valued, a situation that, at a minimum, requires careful watching. Here are two charts that indi-
cate the extent of the rich valuation:

There are several reasons that could be given for the

strong market performance weve seen in recent years,
including a heavy dose of corporate buybacks, improv-
ing corporate profitability (see chart on the prior
page), and a well-managed Fed which is doing every-
thing it can to avoid disruption while slowly
normalizing monetary policy.
The following pages provide additional analysis.
 L a n e A s s e t M a n age m e n t Page 5
Market Valuation

The PE ratio is the broadly accepted measure of market valuation. Here we have an historical view of the PE ratio for the S&P 500 and the
tech-heavy NASDAQ. Also shown is the Shiller (or cyclically adjusted) PE ratio (also for the S&P 500) which is based on a divisor of a 10-year
moving average of earnings adjusted for inflation. In all cases, we see the respective PE ratios at elevated levels.
L a n e A s s e t M a n age m e n t Page 6
Market Valuation

The chart on the upper left shows that the price to earnings, price to
cash flow and price to book are not far above their respective 25-
year averages while price to sales is close to its 25-year all-time high.
The chart on the above right shows that, on a price to book basis, the
valuation for most sectors is above or well above the respective long
term averages.
The chart on the left shows that, on a price to book basis, the U.S. is
at a 15-year high while other regions of the world are near or below
their 15-year average.
** *** **
While these charts and the earlier ones show stretched valuations,
on the strength of forecasted corporate earnings, a Fed that wants to
avoid disruption, and an Administration that is anxious to spur eco-
nomic growth, I believe it is time to be cautious though not yet
overly concerned.
 L a n e A s s e t M a n age m e n t Page 7
S&P 500 Total Return

The second quarter of 2017 was not as strong as the first with the S&P 500 gaining about 3.1% (9.2% for
the first the first six months of the year). From a technical perspective, trend remains positive while mo-
mentum seems to be struggling. It appears that the impact of the very strong first quarter profit results
disclosed after the end of the quarter were largely discounted in the first quarter S&P performance as the
second quarter market performance was less impressive than the first. If this pattern repeats, the third
quarter market performance may not be quite so strong as the first quarter as the Zacks Research estimate for Q2 earnings
growth is currently less than half the actual for Q1 (5.8% vs. 13.4%). FactSet.com estimates Q2 growth of about 6.5%, still less than half of
growth in Q1. Of course, if earnings start to come in above expectations, this would stimulate the market, all other things being equal.
In addition to the potential earnings outlook, there are other factors that, on balance, look to weigh on Q2 performance, including a stretched
market valuation (as discussed in preceding pages), geopolitical risk, and an uncertain outlook for Trumps legislative agenda. While I remain op-
timistic that the economy remains strong enough to keep the market from a major correction, a 5-10% correction could happen at any time.

SPY is an exchange-traded fund designed to match the experience of the S&P 500 index adjusted for dividend reinvestment. Its prospectus can be found online. Past performance is no
guarantee of future results.
 L a n e A s s e t M a n age m e n t Page 8
All-world (ex U.S.)

International equities, represented here by Vanguards All-world (ex U.S.) exchange-traded fund,VEU,
completed the quarter with a 5.7% gain (14.8% for the first two quarters and well ahead of the S&P 500).
Strength was found in many regions, including the Eurozone, Asia (not including China or Japan), and
Mexico. From a technical perspective, while VEU still enjoys positive trend, momentum is weakening (as
with the S&P 500) and looks in danger of turning over. If VEU slips below its 50-day moving average
trend, that could result in a re-test of support just below $49. However, the recent bounce off the 50-day moving average,
which has occurred several times this year, is a promising technical development.

VEU is an exchange-traded fund designed to match the experience of the FTSE All-world (ex U.S.) Index. Its prospectus can be found online. As of 11/4/16, VEU was allocated as follows:
approximately 19% Emerging Markets, 44% Europe, 30% Pacific and about 6% Canada. Past performance is no guarantee of future results.
 L a n e A s s e t M a n age m e n t Page 9
Asset Allocation and Relative Performance

Asset allocation is the mechanism investors use to enhance gains and reduce volatility over the long term. One useful tool Ive
found for establishing and revising asset allocation comes from observing the relative performance of major asset sectors (and
within sectors, as well). The chart below shows the relative performance of the S&P 500 (SPY) to the Vanguard All-world (ex U.S.)
index fund (VEU).
In this chart, the relative strength of U.S. equities has weakened on a net basis this year with a negative technical outlook on both trend and mo-
mentum. That said, a shift in momentum seems to be underway that, if theres follow-through with trend, would reassert dominance for the
S&P 500. While most of the international strength is coming from emerging markets, even the developed international markets have outper-
formed the S&P 500 over the last twelve months, as shown in the chart on page 1.

SPY and VEU are exchange-traded funds designed to match the experience of the S&P 500, (with dividends) and the FTSE All-world (ex US) index, respectively. Their prospectuses can be
found online. Past performance is no guarantee of future results.
 L a n e A s s e t M a n age m e n t Page 10
Income Investing

Investment grade corporate bonds, represented below by the exchange-traded fund LQD, have outper-
formed expectations so far this year as the so-called Trump reflation trade has not yet materialized
and investors have sought safe haven assets. Technically, the outlook for LQD is positive with rising trend
though weakness is beginning to show up in momentum suggesting a potential reversal.
On the right, we see the inverse relationship between interest rates and corporate bonds has remained
intact.

LQD is an ETF designed to match the experience of the iBoxx Investment Grade Corporate Bond Index. Prospectuses can be found online. Past performance is no guarantee of
future results.
 L a n e A s s e t M a n age m e n t Page 11

Asset Allocation and Relative Performance

The trend of relative strength in the S&P 500 compared investment grade corporate bonds remains positive while the momen-
tum has extended its negative outlook. While such divergence between trend and momentum cannot last, the performance ra-
tio seems to have an upper bound suggesting that equities may be on the verge of losing out to fixed income, the recent break-
through notwithstanding. From an asset allocation perspective, a balanced approach seems most appropriate.

SPY and LQD are exchange-traded funds designed to match the experience of the S&P 500, (with dividends) and the iBoxx Investment Grade Corporate Bond Index, respectively. Their
prospectuses can be found online. Past performance is no guarantee of future results.
 L a n e A s s e t M a n age m e n t Page 12
Interest Rates

Shown on the left below are the 2-year and 10-year U.S.Treasury yields for the last three years. The 2-year yield might be
taken as a proxy for the markets opinion about expectations for Fed funds rate changes. The 10-year yield is a reflection
of not only domestic attitudes about changes in domestic interest rates and the demand for funds, but also the global in-
terest rate environment and the developing relative strength or weakness in the U.S. dollar. As you can see, both yields
have been volatile in 2017 with the 10-year back to near where it started the year and the 2-year rate considerably higher
than at the beginning of the year.
On the right is a comparison of the Treasury yield curve currently, at the beginning of the year, and a year ago. This chart shows the flattening of
the curve suggested by the chart on the left. While this flattening is far from the pattern indicative of an impending recession, especially since it
is coming about more by an increase the short term rate than a decrease in the long term rate, it bears watching in coming weeks.
Page 13 L an e A ss et M an ag em ent
Disclosures
Edward Lane is a CERTIFIED FINANCIAL PLANNER. Lane Asset Management is
a Registered Investment Advisor with the States of MA, NY, CT and
NJ. Advisory services are only offered to clients or prospective clients where
Lane Asset Management and its representatives are properly licensed or ex-
empted. No advice may be rendered by Lane Asset Management unless a cli-
ent service agreement is in place.
Investing involves risk including loss of principal. Investing in international and
emerging markets may entail additional risks such as currency fluctuation and
political instability. Investing in small-cap stocks includes specific risks such as
greater volatility and potentially less liquidity. Small-cap stocks may be subject
to higher degree of risk than more established companies securities. The illiq-
uidity of the small-cap market may adversely affect the value of these invest-
ments.
Investors should consider the investment objectives, risks, and charges and ex-
penses of mutual funds and exchange-traded funds carefully for a full back-
ground on the possibility that a more suitable securities transaction may exist.
The prospectus contains this and other information. A prospectus for all
funds is available from Lane Asset Management or your financial advisor and
should be read carefully before investing.
Note that indexes cannot be invested in directly and their performance may
or may not correspond to securities intended to represent these sectors.
Investors should carefully review their financial situation, making sure their
cash flow needs for the next 3-5 years are secure with a margin for error. Be-
yond that, the degree of risk taken in a portfolio should be commensurate
with ones overall risk tolerance and financial objectives.
The charts and comments are only the authors view of market activity and
arent recommendations to buy or sell any security. Market sectors and re-
lated exchanged-traded and closed-end funds are selected based on his opin-
ion as to their usefulness in providing the viewer a comprehensive summary of
market conditions for the featured period. Chart annotations arent predictive of
any future market action rather they only demonstrate the authors opinion as to
a range of possibilities going forward. All material presented herein is believed to
be reliable but its accuracy cannot be guaranteed. The information contained
herein (including historical prices or values) has been obtained from sources that
Lane Asset Management (LAM) considers to be reliable; however, LAM makes no
representation as to, or accepts any responsibility or liability for, the accuracy or
completeness of the information contained herein or any decision made or action
taken by you or any third party in reliance upon the data. Some results are de-
rived using historical estimations from available data. Investment recommenda-
tions may change without notice and readers are urged to check with tax advisors
before making any investment decisions. Opinions expressed in these reports may
change without prior notice. This memorandum is based on information available
to the public. No representation is made that it is accurate or complete. This
memorandum is not an offer to buy or sell or a solicitation of an offer to buy or
sell the securities mentioned. The investments discussed or recommended in this
report may be unsuitable for investors depending on their specific investment ob-
jectives and financial position. The price or value of the investments to which this
report relates, either directly or indirectly, may fall or rise against the interest of
investors. All prices and yields contained in this report are subject to change with-
out notice. This information is intended for illustrative purposes only. PAST PER-
FORMANCE DOES NOT GUARANTEE FUTURE RESULTS.
Periodically, I will prepare a Commentary focusing on a specific investment issue.
Please let me know if there is one of interest to you. As always, I appreciate your
feedback and look forward to addressing any questions you may have. You can find
me at:
www.LaneAssetManagement.com
Edward.Lane@LaneAssetManagement.com
Edward Lane, ASA, CFP
Lane Asset Management
Lenox, MA