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Quarterly Commentary – September 2019

During the third quarter, US equities ended up flat after a marginally positive month of July mostly for the large cap equities, then moving down in August only to bounce back up close to starting levels of the quarter by the end of September. The following are performance numbers from various popular indexes. Please remember index numbers are not individually comparable to a properly diversified portfolio. Each portfolio may include an allocation to securities similar-to these indexes in varying amounts based on your personal risk tolerance and should only be compared in that context. The S&P 500 was up 20.5% for 2019. The Dow Jones Industrial Average was up 17.5%. The Nasdaq Composite Index was up 21.6%. The Russell 2000 Index was up 14.1%. International equities as represented by the MSCI AC World Ex U.S. Index were up 11.7%. The MSCI Emerging Markets Index was up 5.9%. Fixed Income as represented by the Barclays Aggregate Bond Index ended up 8.5% for the year.

Although still hovering near their high, US equities have failed to break through that ceiling as economic data has recently been sending mixed signals under the shadow cast by trade uncertainties, the political outlook and less clarity on monetary policy. Under the weight of some of these recent uncertainties, consumer confidence fell sharply in September. Manufacturing and exports had been the main reason behind the global economic weakness with very little carry over into the rest of the economy and the services sector.

Stocks have been very resilient in the face of the various risks and without some type of catalyst or some of these risks going away, stocks may remain range bound a little while longer. This resilience may be attributed to the strength of the non-manufacturing parts of the global economy. To the extend that this continues, there should be continued support and presumably limited downside risks to stocks. Catalysts to the upside would be a rebound in manufacturing and trade tensions easing. On the flip side, a carry over of weakness into the non-manufacturing part of economy would increase the chances of a potential recession next year.

On the not so positive side, the situation in Washington is not conducive to providing the clarity markets prefer. The IPO market has started to dramatically underperform. There has been some internal trend shifts with the outperforming stocks year to date through August being down more this past month and the worst performers being up significantly. Usually a shift toward value and away from momentum can be a bad indication for the broad market. Defensive holdings have been leading. The strong dollar presents a challenge to US companies selling overseas, a potential head wind for the economy.

Some of the positives for US Equities are first that we are still in an uptrend with solid breadth, meaning advancing stocks are outnumbering declining ones. Individual investor’s sentiment is subdued without the typical complacency that we encounter at market tops. The job market remains strong as well as the consumer. The Economic Diffusion index that tracks the net number of economic readings that are better than expected over a 50-day period has turned positive after being negative for a record number of days. The Fed is easing rates in 2019 while there is no indication that a recession is around the corner. Historically that is a positive for the markets. With the decline in interest rates, housing market activity has bounced back since the beginning of the year with the last couple of months new home sales making new highs, permits surging and sales of existing homes up as well. Equity valuations remain reasonable and there is no indication of over-value by historical standards.

We hope that you have an enjoyable fall season and we are thankful for the opportunity to serve you.