Three Directional Changes In Three Months Set The Stage For New Highs To Start Q3

Quarter 2 - 2019 Market Update

Helping families manage, preserve, and distribute wealth since 1975.

July 22, 2019

By Eric W. Hilliard

CERTIFIED FINANCIAL PLANNER ™

Branch Manager

We hope you have been enjoying summer. Over the July 4^th holiday we took a few days away to relax at the beach with Everett. We boated, kayaked, grilled out and watched fireworks with several family members and friends. We also spent a few days in the N.C. mountains with family, where we saw beautiful waterfalls and enjoyed a bit of hiking. We are grateful for some opportunities to relax and recharge!

Celebrating the July 4^th holiday was a great way to kick off the third quarter and this year, anyway, markets seem to also be in a celebratory mood. As I began writing this at 9:51 am Wednesday, July 10^th the S&P 500 hit 3000 for the first time ever. The index followed that up by closing at a high of 3014 on July 15^th.

Second quarter market action summary

Despite continued concerns over trade disputes, equity markets have made nice progress the first two quarters of 2019. The first quarter the S&P 500 moved mostly upward traveling from 2506 December 31^st to 2834 March 29^th, the last business day of the month. During the second quarter markets continued marching higher and put in a new high at 2945 April 30^th. Markets then experienced a pullback of about 7% during May and early June. Equity markets regained their footing and resumed the march higher starting June 4^th.

Markets have been buoyed by a few positive developments which led to the June rally.

1. Federal Reserve Chairman Jerome Powell backed off on previous comments regarding his expectation for continued interest rate hikes. His communication during the early months of 2019 indicated the Federal Reserve no longer believes there is a need to raise rates because the economy continues to grow, but at a slower pace than 2018. Trade disputes and the resulting uncertainty are largely to blame. Expectations have risen that the Fed may even lower rates slightly during 2019, possibly making the first cut later this month.

2. Since early June there has been continued evidence of China and the U.S. officials working together towards a trade agreement. Those companies whose stocks have been particularly hurt because of trade uncertainty have rallied strongest in the anticipation of some sort of deal.

These developments produced the largest quarterly gain for the S&P 500 since the third quarter of 2009 and the strongest first half since 1997. As for whether markets will continue delighting investors through summer, largely depends, in our opinion, on the continuation of positive trade developments and a Federal Reserve continuing to indicate they are more likely to lower rates or at least hold them steady.

Below you can see the performance from equity and fixed income markets as well as our model indices during June as well as year-to-date and the past 12 months.

Returns as of 6/30/19

Returns provided by Morningstar as of 9/30/18.

Recession watch…. when might one occur?

Many market watchers are trying to guess the timing of the next recession. The U.S. economy has grown for 121 consecutive quarters following the Great Recession, making this the longest economic expansion in U.S. history. You may hear some suggest a recession is due simply because of the duration of this expansion. Recessions don’t happen though because some predetermined period of expansion has occurred. They happen because economic conditions begin to deteriorate and several factors usually are to blame. Our experience has taught us it is more prudent to watch changes in data such as wage inflation cutting into corporate profits, higher interest rates that make borrowing more expensive as well as several other factors to try and determine when a recession is on the horizon.

Currently, the economy is slowing, but still growing. Unemployment remains low, consumers are in good shape and conditions overall remain pretty favorable. Trade concerns and tariffs have slightly dampened corporate earnings though, so that is something we continue to monitor. There will be another recession in our future, however, we believe It may be a pretty shallow recession because at this point, we don’t see any major stresses in the economy. If the situation changes and data indicate otherwise, we will change our opinion.

Can the stock market rally continue?

For now, we believe the answer is yes, especially if the Federal Reserve lowers rates .25% in the near future.

We have believed markets may experience a pullback from recent highs late summer or early fall if debt ceiling negotiations drag on until the last minute, as has happened in several other instances. At the moment though, the White House and Congress appear to have made a deal, so this concern may be alleviated.

A high-quality comprehensive trade deal with China would certainly provide an additional boost to markets.

History agrees, suggesting a strong first half may lead to additional (yet possibly smaller) gains for the remainder of the year

The rally off the December 24^th low has been a very healthy one, with a broad range of sectors participating in gains indicating strength. Additionally, the Wall Street Journal notes in their Markets write-up Monday, July 8^th that After a strong first half, history suggests markets are likely to end 2019 higher. Eleven other years the S&P 500 index has climbed 15% or more in the first half of the year. In those years when the first six months gained 15% or more, stocks have always finished the year with positive gains. However, during years when the S&P 500 climbed between 15% and 18% in the first half, gains over the next two quarters tended to be smaller.

We once again joined some of the best in this business at our annual Raymond James National Conference. The topics mentioned in this letter were all discussed at length and a very deep bench of experienced investors, economists and market experts helped us form our opinions expressed here.

Please check in periodically with our web page and social media sites for updates:

Facebook: https://www.facebook.com/hfgraymondjames

Linkedin:

Eric Hilliard, CFP®, Branch Manager https://www.linkedin.com/in/ewhilliard/

Wade Stafford, CFP®, Associate Financiial Advisor https://www.linkedin.com/in/ericwstafford/

Jenny Hilliard, Investment Executive: https://www.linkedin.com/in/jennyhilliardrj/

Please let us know of any significant changes in your life or situation that could impact your financial plan. In the meantime, we continue to follow the processes we have developed over the years that enable us to provide you our very best. Thank you for your trust in me and in our practice.

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DJ GLB Aggressive Index - The DJ GLB Aggressive is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Aggressive index is 100% of All Stock Portfolio Risk.

DJ GLB Conservative Index - The DJ GLB Conservative is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Conservative index is 20% of All Stock Portfolio Risk.

DJ GLB Moderate Aggressive Index - The DJ GLB Moderate Aggressive is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate Aggressive index is 80% of All Stock Portfolio Risk.

DJ GLB Moderate Conservative Index - The DJ GLB Moderate Conservative is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate Conservative index is 40% of All Stock Portfolio Risk.

DJ GLB Moderate Index - The DJ GLB Moderate is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate index is 60% of All Stock Portfolio Risk.

The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy and banks. The Russell 2000 is an unmanaged index of small cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays U.S. Corporate High Yield Bond Index is composed of fixed-rate, publicly issued, non-investment grade debt, is unmanaged, with dividends reinvested and is not available for purchase. The index includes both corporate and non-corporate sectors. The corporate sectors are Industrial, Utility and Finance which include both U.S. and non-U.S. corporations. An investment cannot be made in these indexes. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Small and mid-cap securities generally involve greater risks. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. The performance noted does not include fees or charges, which would reduce an investor's returns. Asset allocation and diversification do not guarantee a profit nor protect against a loss. Debt securities are subject to credit risk. A downgrade in an issuer’s credit rating or other adverse news about an issuer can reduce the market value of that issuer’s securities. When interest rates rise, the market value of these bonds will decline, and vice versa. While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, state or local taxes. Any Opinions are those of Eric and Jenny Hilliard and are not necessarily those of RJFS or Raymond James.

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