In recent months, many investors have wondered whether Barack Obama or Mitt Romney would be better for financial markets. At first glance, today's market decline appears to answer that question: stock prices are down 2% as of this writing. There is little question that Mr. Romney's plan was significantly more pro-business than that of our President. However, most American's would have to admit that this is a poor comparison given that the Obama administration's philosophy has been closer to anti-business than any president in recent history. Even Bill Clinton – the consummate Democrat – played well with republicans and big business and really fired up the

wheels of commerce and the economy. One could use today's market slump as an indication of what investors have to look forward to in regard to financial markets…however our work suggests that such a view would be mistaken. Here is why:

Though the president's agenda has not been pro-business, we must recall that he inherited one of the worst economies since the great depression and stopped it from getting worse. Though growth is sluggish and unemployment is frustratingly high, corporate America has adapted to this environment quite well. Many companies – particularly some of those in your portfolio – have demonstrated an uncanny ability to prosper throughout this environment and we would suggest that they will continue to do so regardless of the administration's policies. Of course, a small dose of pro business policy from the administration would do wonders for commerce and the economy – a change that is possible over the next four years.

In regard to the view that our President's agenda will not be good for stock prices, a mere review of that last four years strongly suggests otherwise. Since Mr. Obama's inauguration, equity prices have advanced over 50%. We admit that markets have been punctuated with historically high volatility during this period, but these returns are attractive and do not suggest that stock prices will necessarily be muted over the next four years. In addition, as we have mentioned in previous Strategy Updates, stock prices – both domestically and globally – are trading at very appealing valuations. Given the "lost decade," most stocks are trading at the same price as they were in 1999, but the underlying corporate profits are significantly higher, many making three times as much profit. This valuation phenomenon was last seen in the late 70s and resulted in one of the greatest stock bull markets of our generation. We are not suggesting that such an event is currently upon us (though it could be), but rather confirming that stocks are not overvalued at current levels and can easily go higher over the next four years based solely on price relative to profit growth.

We are now quickly approaching the "fiscal cliff" which is best characterized by the fact that the US government spends more than it generates in revenue. We continue to believe that this problem will be effectively managed, which will be better for the economy in the long run. However, given the outcome of the election, we can now assume that higher taxes on income and capital gains will be part of this plan.

The biggest risk we face as investors is running out of assets. Therefore, we must always be prudent in our spending policies and be on the lookout for the risk of catastrophic loss. In the financial markets, catastrophic loss is almost always associated with economic recessions, such as most investors experienced in 2008. Fortunately our Active Risk Management cushioned this decline. Our research, and that of our research partners, suggests that the risk of recession is currently very low. However, we will continue to apply our Active Risk Management process to your portfolio through your asset allocation, sector management and the use of carefully placed stop loss orders (unless you have directed us not to employ stop loss orders).

Today's market slump may continue tomorrow. However, we believe stock prices are still in normal correction mode and are at very oversold levels, suggesting that this downside volatility is likely temporary.

Congratulations to President Obama and his family. Let's hope and pray he makes good choices for us all over the next four years.

We hope this update finds you well. If you have any questions or would like to get together for a portfolio review please let us know. Additionally if you have experienced any significant changes in your financial circumstances, please take the time to update our team.

Sincerely,

James E. Demmert
Managing Partner