We hope this update finds you well. Your portfolio reports are uploaded to your client portal for the second quarter, and both stock and bond markets continued to perform well. Since the close of the quarter in June, domestic politics took center stage. Following the first presidential debate, a dramatic series events unfolded with the most horrific being an assassination attempt on former president Donald Trump and the current president, Joe Biden, formally announcing his withdrawal from the presidential race. These events alone would typically create panic in the investment marketplace; however, markets have stayed calm. This is in part due to the fact that the attempt on Trump’s life was unsuccessful, and the withdrawal of Biden still leaves the American voters with another option. More importantly, the US economy continues to show its resiliency following historic increases in interest rates. Below are some data highlights of recent market trends and economic developments:

ECONOMIC AND MARKET INSIGHTS

U.S. Economy and Federal Reserve Policy

The U.S. economy continues to show signs of strength and resilience with a stronger than expected increase in GDP of 2.8%. The Federal Reserve is anticipated to cut interest rates at least once this year, although the timing remains uncertain and could push into next year. The Fed’s cautious approach reflects their focus on achieving sustainable inflation levels around 2%​.

The S&P 500 has performed remarkably well, reaching all-time highs and contributing to a strong first half of the year for investors. Historically, years with strong first halves have tended to continue performing well for the rest of the year​.

Inflation and Interest Rates

Inflation remains a key concern, with both consumer and producer prices rising. The Producer Price Index (PPI) saw its largest increase in six months, driven by higher fuel and food costs. This has implications for the Personal Consumption Expenditure (PCE) index, the Fed’s preferred inflation measure.

Breakeven rates, which help gauge inflation expectations, have shown a significant increase. This suggests that the market expects inflation to remain elevated, potentially influencing Fed policy to keep interest rates higher for longer.

International Equities and Fixed Income

International equities are currently valued at historical lows relative to U.S. stocks. While valuations are just one factor, potential future dollar weakness could provide tailwinds for non-U.S. stocks.

High-quality fixed income assets offer higher future returns given the elevated base rates. Credit spreads remain tight, making investment-grade options more attractive, while specialty areas like securitized and private credit present additional opportunities​.

Consumer Behavior and Confidence

Consumer confidence has dipped slightly despite the strong stock market performance and stabilizing interest rates. Concerns about the upcoming election and financial futures are influencing consumer sentiment and spending behaviors.

Strategic Advice

Given the current economic landscape, we advise maintaining a diversified portfolio to mitigate risks and capitalize on growth opportunities. Here are some specifics we implement on your behalf:

Diversification: Ensuring your portfolio includes a mix of equities, fixed income, and international assets to spread risk and enhance potential returns.

Monitor Economic Indicators: Staying informed about key economic data, including inflation rates, interest rate expectations, and consumer confidence, as these can influence market movements.

Long-Term Approach: Maintaining a long-term perspective on your investments, avoiding short-term reactions to market volatility. Historical data suggests that markets tend to recover and grow over time.

As always, we are here to help you navigate these uncertain times and make informed decisions for your financial future. Please do not hesitate to contact us with any questions or concerns.