Mid Third-Quarter Commentary

So far the third quarter has been positive in regard to the performance of U.S equities, and negative for both emerging and other developed markets. Through August 15th, the S&P 500 has outperformed the MSCI EAFE Index, an index of non-US developed market equities, by an impressive 6.14%. Many of the same themes from the 2nd quarter remain intact, especially in regard to the ongoing trade negotiations between the United States and foreign nations. The continued underperformance of international equities is a direct result of this; however, our analysis suggests that international equities are much closer to their bottom than their January peak. We will continue to closely monitor the geopolitics concerning trade, and may seek to add exposure to international equities at a valuation that we view attractive.

In the U.S, corporate earnings have been quite strong for the quarter. With 466 of S&P 500 companies having reported earnings, 83.9% have reported earnings higher than their respective consensus estimate. Quarter to date the sectors that have performed the best have been healthcare, telecom and information technology. Small-cap stocks have continued to perform well, however slightly narrowing their lead to large-cap stocks by only 11 basis points since the beginning of the quarter. In addition, there remains a decent amount of merger and acquisition activity which we view as a positive indicator for both the U.S economy and asset prices.

On the monetary front, we continue to believe that there is a strong likelihood that the Federal Reserve will hike twice more this year; currently the federal funds futures market is implying a 92% chance of a 25 basis point rate hike during the Federal Reserve's next meeting on September 26th. As we expected, the front-end of the yield curve has continued longer-term flattening trend with the difference between the 2 and 10 year U.S. Treasury yields decreasing by 7 basis points since the beginning of the quarter. So far this quarter, investment grade corporate debt has performed the best of the main segments of the cash fixed income universe. As we mentioned in our second quarter recap credit spreads have widened throughout the year, and consequently corporate bonds have underperformed relative to both Agency mortgage-backed securities and U.S Treasuries. We attribute this recent bout of spread tightening to the strong earnings that most firms have been reporting, and the recent risk-on sentiment of investors.

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