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2019 Q2

Having passed the halfway mark for the year, the economy continues to proceed at this late stage in the business cycle with resiliency. As we have stated before and as it continues to look, the US economy is still growing despite its growing more slowly this year. Some parts of the economy are growing faster than others, just not as strong as it was a year ago. Globally, we see the same trends in industrial production in Canada, Eastern Europe, India and China, while Mexico, Brazil and Western Europe are in a slight recessionary phase of production. All this to say that there is really nothing new at the end of the second quarter as compared to the first quarter.

As we head towards the end of the year, things start to look more interesting. Year over year earnings and a potential easing of interest rates by the Federal Reserve will be front and center for equity and bond markets. Also, the lingering trade discussions with China will continue to cause market uncertainty due to the threat of retaliation in the form of new tariffs and taxes on U.S. companies. By the time we reach the end of the year we expect the economy will have slowed but not into a recession.

If we look further down the road, our view that the economy could be back to an expansionary phase by the end of next year is starting to take shape. There are early signs of uptrends in some leading indicators that look 15 to 18 months out, e.g., retail sales and other financial data. However, it is still early to make this call since the trend has not yet been established. Not all the leading indicators point higher with some of the shorterterm indicators continuing to decline as we would expect to see at this point in the cycle.

Investors are hopeful that trade disputes will not blow up into trade wars. I too am hopeful, but we cannot underestimate the difficulties escalating trade tensions may bring for businesses, equity markets, and political parties. Our repositioning of the fixed income holdings in portfolios has worked well, and our equity weightings have delivered strong performance. We could see additional gains in the market in the latter half of the year, but we are cautious in making this prediction given the number of political, fiscal, and global uncertainties the economy faces.

Before I end this newsletter, I want to take a minute to share something that is important to me. Recent legislation, including the tax reforms, have negatively impacted small businesses relative to large corporations. I believe it is vitally important to create a structure for the continued creation and support of small businesses because of the economic impact they have on our country. According to the Small Business Administration and the U.S. Census Bureau, small business accounts for 99.7% of all U.S. businesses. Small businesses employ 56.8 million people, have created 66% of net new jobs since the 1970s, and generate 54% of all U.S. sales. It is an area that is frequently overlooked, and as a small business, we greatly appreciate each  and every one of our clients. Thank you for your trust and continued support.

Marc Henn, CFP®