The stock market extended record highs in the second quarter mostly on the back of

information technology stocks that have rallied by more than 17% this year. While some

valuation measures of equities appear stretched, an acceleration in company earnings and

revenue growth, low inflation and low interest rates are providing impetus for further gains in

the stock market. Meanwhile, the bond market continues to surprise. After a yield surge in

late 2016 and a 0.25% increase in the Fed funds rate, long term bonds have rallied as

witnessed by the near-4% gain through the end of June! Even foreign markets came back to

life with the MSCI World ex U.S. Index rising nearly 11%.

The Economy

First quarter GDP rose a weak 1.4% falling well below the 3% potential growth that

economists tell us is a reasonable expectation based on historical analysis. Our current

economic growth of less than 2% is one of the slowest growth expansions on record. From

our perspective, the culprits are the absence of favorable fiscal policy and the burden of overregulation.

Even though stock markets have risen to record levels both in the U.S. and abroad,

we still have not seen any traditional stimulus efforts coming out of Washington. However,

steps to reduce regulation across the economy may be having the intended effect of lowering

the costs of being in business. Both consumer and business confidence have risen to record

levels -- an important contributor to future economic activity. Slow economic growth is

favorable as we are not experiencing demand pressures that will elevate traditional measures

of inflation. On the other hand, slow growth inhibits rising standards of living and limits the

ability of the federal government to pay its bills through rising tax revenues.

The most important factor in keeping our economy growing has been the low and stabilizing

oil price -- somewhere between $45 and $55 a barrel. As lower oil prices work their way

through the economy, there is downward pressure on prices across the economy as companies

incorporate lower energy costs into intermediate and final goods prices. As output from the

U.S. increases, the revenues generated by those sales stay in the U.S. rather than being

shipped off to OPEC nations. On one hand, the decline in oil prices has been great for

consumers and should continue to put downward pressure on inflation. On the other hand,

those lower prices penalize our domestic producers that must dance to the tune of OPEC's

efforts to put them out of business by driving oil prices down. If oil prices soar above that $55

level, then there will be a surge in U.S. production or if oil collapses below the $45 level then

domestic production will shrink accordingly. These supply forces will tend to keep oil prices

in a general equilibrium.

On balance, we expect to see improving economic growth for the second quarter but little if

any improvement above a 2% real growth rate for the balance of 2017 unless we get tax rate

reductions or federal spending increases.

The domestic economy is improving slowly and would grow a great deal faster if the current

administration could push through tax-rate reductions and decreased government regulation.

The private sector is improving due to rising consumer and business confidence. The prospect

of reasonable oil price stability and a less volatile dollar should add to business certainty and

improving output. If profit forecasts hold up through year-end we expect to see a continued

rise in equity prices while interest rates remain essentially flat.

Diane V. Nugent, President/CEO

Thomas E. Nugent, Executive Vice-President