*This report was written on July 1, 2019.
The investment results of the second quarter were solid, with stocks and bonds both producing returns in excess of 3%. Major headlines will tell you that the S&P 500 had its best June since 1955, stocks posted their best first-half of the year return since 1997, and the U.S. is now in the longest economic expansion ever recorded; however, the headlines don’t tell you about the turbulent journey. Much like the previous six months, volatility was present during the quarter. For example, the S&P 500 Index was up almost 4% in April, then down more than 6.5% in May, and fortunately rallied more than 7% in June.
The highly reported trade tensions with China pressed markets lower mid-quarter. Then, remarks from the Federal Reserve Bank shifted sentiment toward believing that a possible interest rate cut later this year pushed markets higher to close out the quarter. Interestingly, equity markets increased during the quarter while concerns of a global economic slowdown were intensifying and forced bond yields down across the globe.
For the quarter, large capitalization stocks led the way, being up 4.30% and besting their smaller counterparts that were up 2.10%. International stocks performed well during the quarter, posting a return of 3.68%. With the drop in yields, bonds saw strong price appreciation. The U.S. Bond Aggregate was up 3.08%, while municipal bonds were up 2.14%. Foreign bonds were slightly better performers with returns of 3.57% for the quarter. 
While markets have certainly ascended to new highs, it is not without mounting risks. We continue to be concerned about U.S. trade policy, and more specifically, about the trade war with China. We believe something needs to change with how China uses unfair trade practices and steals intellectual and propriety property; however, when the world’s two largest economies are entangled in a trade war, it has the potential of causing a global recession. We still believe that self-interest will bring the two superpowers back to the negotiating table, and a resolution will be agreed upon yet this year.
Although Brexit has recently taken a back seat to the U.S.–China trade tensions in the headlines, we remain quite concerned about the ultimate economic divorce of the United Kingdom and the European Union. We will be carefully watching second-quarter earnings announcements of companies, as we suspect they will be slightly weaker than this time last year. While this, by itself, is not enough to cause us to shift our stance, it would be two consecutive quarters of earnings slowing down, which could be the start of a trend. While economic data is weakening, there continue to be some bright spots. We believe the near-term fundamentals are stable. The employment market is strong and inflation is low. The Fed appears to be very accommodating and willing to cut interest rates if needed.
No one can say with certainty when markets are going to drop. We have long stressed that trying to time markets is a loser’s game; however, we recognize risks are rising, which is inevitable in such a long economic expansion. Caution will be something that is top of mind these forthcoming months and quarters. If you have had any significant changes in your situation or are considering a portfolio distribution that we have not previously discussed, please be sure to contact us. These are situations that could impact how your portfolio is allocated.
Adhering to a disciplined investment process, which focuses on understanding your cash flow needs and personal situation is vital to ensuring your portfolio is allocated appropriately. Having a properly allocated portfolio significantly reduces the possibility of having to sell assets during downturns at unfavorable prices. Making certain your investment allocation aligns with your financial plan is key to successful investing.
The opinions voiced in this letter are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth in this printing may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Stock investing involves risks, including loss of principal. Bond values will decline as interest rates rise and bonds are subject to availability and changes in price. There is no guarantee that a diversified portfolio will enhance overall return or outperform a non-diversified portfolio. Diversification does not protect against market risk.
 Morningstar Office: Large Cap U.S. stocks as measured by the S&P 500 Index, Medium Cap U.S. stocks as measured by the S&P Mid Cap Index and Small Cap U.S. stocks by the Russell 2000 Index. Foreign stocks as measured by the MSCI EAFE ND Index and the Emerging market stocks measured by the MSCI EM ND Index. Fixed Income/Bonds as measured by the Barclays U.S. Aggregate Bond Index, Barclays Municipal Index, and the Citi World Government Bond Index. Real estate as measured by the Dow Jones U.S. Select REIT Index. Commodities as measured by the Bloomberg Commodity Index. Inflation as measured by the U.S. BLS Consumer Price Index All Urban SA 1982-1984.