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The seesaw between trade tensions and easy monetary policy has been fairly balanced this year. However, the balance is shifting as the Fed easing policy seems baked in and the trade war concerns persist despite the administration’s decision to delay the most recent round of tariffs on Chinese goods. Fixed income markets seem to be pricing in not only a benevolent Fed prepared to offer a few “insurance” cuts; they’re also discounting some risk of a full scale rate cutting cycle as evidenced by the inverted yield curve. An uptick in recession risk makes us more cautious on overall risk levels, especially in economically sensitive equity holdings and below-investment grade corporate debt.

The pervasive concern amongst investors over the durability of this record breaking economic cycle has created multiple knee jerk sell-offs over the course of the past year. Three have been driven by headlines regarding the trade war and two by brief yield curve inversion. The downdrafts have been quick and tempered, as have the rallies. Those that went to the sidelines in cash have suffered as most markets are still up over 8% this year. All the while, the US consumer keeps chugging away but has slowly become one of the lasts bastions of global economic strength. Handicapping how to play this has become increasingly difficult. We have lengthened duration on the fixed income side and still believe growth and yield-oriented equities will outperform all other asset classes over the next year.

The most likely scenario for the balance of the year is that markets will stay range-bound, assuming there is no definitive end to trade tensions with China. Valuations are ripe but the fruit is not rotting yet as buybacks will keep EPS growing. The Fed will continue to be accommodative and the US consumer will keep spending which should forestall a recession in 2020. In general, monetary stimulus seems exhausted but it’s been fool’s play to underestimate central banks hubris in trying to be economic puppet masters. We have our mid-year investment summit this week so stay tuned for further intel on the balance of the year.

Please let me know if you have any questions via phone at 804-774-2087 or email at Jesse.Ellington@middleburgfinancial.com.


Disclosures:
Past performance quoted is past performance and is not a guarantee of future results. Portfolio diversification does not guarantee investment returns and does not eliminate the risk of loss. The opinions and estimates put forth constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

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