Executive Summary:
- Tweets, Tariffs and Trade. The market does not like uncertainty, and overnight tweets announcing new tariffs give investors the uneasy feeling that trade policy is being made up on the fly. There was more dispersion in performance across asset classes in the second quarter in part due to trade issues.
- Focused on the Fundamentals. Economic performance across regions has changed with the global synchronous recovery now over. Softness is apparent in the Euro area, Japan, and emerging markets with the U.S. being the exception as economic growth appears to be accelerating.
- Young for Its Age. The current economic expansion started in July 2009, which makes it 108 months old as of the end of the second quarter. The second longest expansion on record. Despite the age of the current cycle on paper, it has many of the characteristics of a younger expansion.
- Current Positioning. A stronger U.S. dollar and softness in China make the outlook for emerging market equities more uncertain. We favor U.S.-centric businesses, notably small and mid-cap stocks, that should continue to benefit from corporate tax cuts and deregulation. We also favor regional banks for these reasons as well as being beneficiaries of higher interest rates, which we continue to see as the likely direction.
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