Sideways consolidating markets can test traders’ emotions. It is always a challenge to avoid overreacting to headline news and daily market gyrations. The broad US market as represented by the S&P 500 traded in a sideways range for most of Q2 as capital continued to rotate among both market cap and sectors.
Breadth has been positive, with small- and mid-cap continuing to outpace the broad index as capital looks to anchor to pure-play domestic vs. multinationals. Tech and health care, particularly biotech, are current market leaders and have been positive contributors to performance. These securities show strong relative strength in our analysis and are represented in the portfolio through our allocations to QQQ, XBI, and IBB.
June was a tough month for international markets as there were few places to hide. Both developed markets and emerging markets have been smacked hard and have pulled back off their strong 2017 runs. Even market leaders such as Japan (SCJ) and Hong Kong (EWH) have dropped sharply. Have the tariff and trade headlines put an end to capital flow to foreign equity markets, or is what we are seeing just a pause off the 2016 bottoms in both DM and EM? We are currently handicapping the decline as a nasty pullback, but market action will always trump opinion. We dipped into European Financials (EUFN) in late June as the sector appears to have created opportunity during its recent decline. Time will tell.
Please review our strategy allocations below but realize that positions can and will change as risk levels change.
US Equity: (60%) Broad market exposure through QQQ & RSP. We would look to add to our small-cap growth (IJT) position on any further weakness.
International Equity: (25%) 50/50 exposure to developed vs. emerging with a tilt towards Asia.
Fixed Income (0%): No position currently. Muni spreads vs. taxable appear attractive.
Commodities (0%): No position currently.
Cash (15%): Comfortable with this level.
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