2nd Quarter 2016 Commentary

Leonard Rickey Investment Advisors

• “Brexit” briefly caused stock prices to tumble, but U.S. stocks quickly recovered and posted positive returns for the quarter.

• There has been a broad trading range for the last and half in the S&P 500. It finished at the top end of the range but did not break through.

• Defensive sectors have led the market over the last year and continued to lead during the quarter.

• Strong outperformance of U.S. stocks relative to Developed Non-US stocks.

Market Summary

The 2^nd quarter of 2016 was defined by Brexit. It was relatively unexciting until the end of the quarter, when the United Kingdom voted to leave the European Union. The vote to leave, known as “Brexit,” caused an extreme reaction in the global financial markets. Global equity markets declined sharply, safe-haven assets like bonds and gold rallied, and the U.S. dollar strengthened significantly against several major currencies, especially the British pound. (See our blog here for more on Brexit).

U.S. equities were one of the best performing markets during the second quarter. U.S. stocks, as measured by the S&P 500 Index, approached their all-time high in June before retreating after Brexit. After the initial shock, U.S. stocks went on to fully recover and finished up 2.5% and back near all-time highs. Developed Non-U.S. stocks (as measured by the MSCI EAFE index) did not fully recover by the end of the quarter and finished the quarter slightly down. Emerging market stocks benefited from recovering energy and commodity prices to finish barely in the positive. Bonds also performed well as yields around the world fell.

Through June 30, 2016. All returns are in U.S. dollars. Source: Morningstar

S&P 500 Stuck in Broad Trading Range

After the first quarter we wrote that “we have yet to break through the neutral trading range of the last year”. While we saw the S&P 500 briefly break up its trading range during the second quarter, it promptly fell back inside the range. The S&P 500 ended the quarter near the top end but had yet to break through. (Update: The S&P 500 broke above this trading range in July). Below is a chart of the S&P 500 since 2015. The yellow line shows the top end of the range and the red and black line show the price movements of the S&P 500[1].

Defensive Sectors Leading

For much of the past year defensive stocks have lead the market. This trend continued in the second quarter. Sectors such as Utilities, Consumer Staples and Telecom performed well while more cyclical sectors such as Technology, Financials and Consumer Discretionary underperformed. The exception was the energy sector which continued its recovery from low commodity prices. Below is a breakdown of sector returns for the quarter[2]:

And here is breakdown of sector performance over the last year

U.S. Stocks vs Non-U.S. Stocks

The other major theme during the quarter was the continue outperformance of U.S. stocks. U.S. stocks have outperformed non-U.S. by a large margin over the trailing 3, 5 and 10 years. We believe it would be the wrong decision to abandon non-U.S. stocks at this time. Not only do non-U.S. stock provide diversification but their valuations are relatively better than U.S. stocks at this point in the cycle. We do not believe the performance difference will last forever. In fact, the difference in performance is cyclical. The graph below shows the difference in 3 year returns between the MSCI EAFE Index and the S&P 500. Since 1972 there have been 6 cycles where non-U.S. stocks have underperformed for one year or longer. The currently cycle is the longest on record currently lasting 79 months. We are not sure when this will change, but the diversification benefit remains.

If you have any questions or would like more information on how this affects your accounts, please contact us.

IMPORTANT DISCLOSURES

Any projections, forecasts and estimates, including without limitation any statement using “expect” or “believe” or any variation of either term or a similar term, contained here are forward-looking statements and are based upon certain current assumptions, beliefs and expectations that Leonard Rickey Investment Advisors (“LRIA”, “we” or “us”) considers reasonable or that the applicable third parties have identified as such. Forward-looking statements are necessarily speculative in nature, and it can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes. Some important factors that could cause actual results or outcomes to differ materially from those in any forward-looking statements include, among others, changes in interest rates and general economic conditions in the U.S. and globally, changes in the liquidity available in the market, change and volatility in the value of the U.S. dollar, market volatility and distressed credit markets, and other market, financial or legal uncertainties. Consequently, the inclusion of forward-looking statements herein should not be regarded as a representation by LRIA or any other person or entity of the outcomes or results that will be achieved by following any recommendations contained herein. While the forward-looking statements here reflect estimates, expectations and beliefs, they are not guarantees of future performance or outcomes. LRIA has no obligation to update or otherwise revise any forward-looking statements, including any revisions to reflect changes in economic conditions or other circumstances arising after the date hereof or to reflect the occurrence of events (whether anticipated or unanticipated), even if the underlying assumptions do not come to fruition. Opinions expressed herein are subject to change without notice and do not necessarily take into account the particular investment objectives, financial situations, or particular needs of all investors.

This report is intended for informational purposes only and should not be construed as a solicitation or offer with respect to the purchase or sale of any security. Further, certain information set forth above is based solely upon one or more third-party sources. No assurance can be given as to the accuracy of such third-party information. Although LRIA strives to update all information on a timely basis, we disclaim any liability should the information or opinions change or subsequently become inaccurate. All information subject to change without notice.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Past performance is no guarantee of future results.

Stock investing may involve risk including loss of principal. International and emerging markets investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Small cap stocks may be subject to a higher degree of risk than more established companies’ securities. The illiquidity of the small cap market may adversely affect the value of these investments.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. The risks associated with investment-grade corporate bonds are considered significantly higher than those associated with first-class government bonds. The difference between rates for first-class government bonds and investment-grade bonds is called investment-grade spread. The range of this spread is an indicator of the market’s belief in the stability of the economy.

The fast price swings in commodities and currencies can result in significant volatility in an investor’s holdings.

There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The

Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

INDEX DEFINITIONS

The Barclays Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.

The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell Index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. It cannot be invested into directly.

The MSCI EM Index is a float-adjusted market capitalization index that consists of indices of approximately 800 stocks and is designed to measure equity market performance in 23 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, and Turkey.

The MSCI EAFE (Europe, Australasia, Far East) Index is a free float-adjusted market capitalization index of approximately 900 stocks and is designed to measure equity market performance in 21 developed market countries outside of North America.

The S&P 500 Cons Discretionary Index is a market cap weighted index comprised of those companies included in the S&P 500 that are classified as member of GICS® consumer discretionary sector.

The S&P 500 Cons Staples Index is a market cap weighted index comprised of those companies included in the S&P 500 that are classified as member of GICS® consumer staples sector.

The S&P 500 Energy Index is a market cap weighted index comprised of those companies included in the S&P 500 that are classified as member of GICS® energy sector.

The S&P 500 Financials Index is a market cap weighted index comprised of those companies included in the S&P 500 that are classified as member of GICS® financials sector.

The S&P 500 Health Care Index is a market cap weighted index comprised of those companies included in the S&P 500 that are classified as member of GICS® health care sector.

The S&P 500 Industrials Index is a market cap weighted index comprised of those companies included in the S&P 500 that are classified as member of GICS® industrials sector.

The S&P 500 Materials Index is a market cap weighted index comprised of those companies included in the S&P 500 that are classified as member of GICS® materials sector.

The S&P 500 Telecom Index is a market cap weighted index comprised of those companies included in the S&P 500 that are classified as member of GICS® telecommunication services sector.

The S&P 500 Technology Index is a market cap weighted index comprised of those companies included in the S&P 500 that are classified as member of GICS® information technology sector.

The S&P 500 Utilities Index is a market cap weighted index comprised of those companies included in the S&P 500 that are classified as member of GICS® utilities sector.

[1] Created by LRIA using StockCharts.com

[2] Morningstar data using S&P 500 sectors