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Second Quarter Key Takeaways

The first half of 2019 saw robust gains across most asset classes, but it certainly wasn’t a smooth ride. Global stock markets got a jump start on the year thanks to progress in U.S.-China trade negotiations and a newly “patient” Fed, but an abrupt breakdown in the trade talks spurred a sharp market sell-off in May. Stock markets subsequently shook off their swoon in June, rebounding on expectations of Fed rate cuts later in the year and (tentative) signs of re-engagement on the U.S.-China trade front.

The S&P 500 hit a new high near the end of June. Large-cap U.S. stocks shot up 7.0% for the month – their best June since 1955. They were up 4.3% for the second quarter, and a remarkable 18.5% for the first six months of the year—their best first half since 1997.

Foreign stocks also notched double-digit gains through the first half of the year. Developed international stocks gained 5.9% in June, 3.2% for the second quarter, and 14.2% for the year to date. European stocks have done a bit better, gaining 15.6% on the year so far. In April, the “Brexit can” was kicked down the road at least until October 31, but the risk of a breakdown in negotiations remains. Emerging-market stocks also rebounded in June, gaining 5.4%. Although emerging-market stocks were only up 0.8% for the second quarter, their first-half gains stand at 12.6%.

Moving on to the fixed-income markets, the 10-year Treasury yield continued to plunge from its multi-year high of 3.2% last October, dipping below 2% following the Federal Reserve’s June meeting. This was a near three-year low, and among its lowest levels ever. The 10-year yield ended the month at 2.0%. Bond prices rise as yields fall, driving the core bond index to a 3.0% gain for the quarter and an impressive 6.1% return so far this year.

Looking ahead, we still see a high degree of uncertainty and a wide range of plausible outcomes over the next 12 months and beyond.  We are of the opinion macro risks have increased. Trade uncertainty has damaged global business confidence in an already weak global economy. While slowing growth is currently being offset by easier monetary conditions, the inevitable impact of potential further central bank rate easing is certainly muted.

We believe our portfolios are positioned to both generate attractive returns over the next five to 10 years and be resilient across this wide range of potential shorter-term risk scenarios. If central banks are successful with their renewed stimulus efforts, our analysis indicates that will favor our positions in global equities and flexible income funds.  

On the other hand, should markets turn south, our portfolios will benefit from our positions in core bonds, lower-risk hybrid alternative strategies, and managed futures.  These lower-risk positions provide insurance while lacking the upside potential offered by individual equities. Defensive investments underperform during bull markets; however, we experienced their benefits during market corrections (including the one in last year’s fourth quarter).  They also present us with potential capital to re-allocate back into U.S. stocks at lower prices and with much higher expected returns if the opportunity should arise.

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