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Three months ago we cheered the spectacular performance of the stock market in the first quarter of the year. But we described ourselves as “neutral” on the outlook for the remainder of the year. We did not expect much potential for further gain in 2019. Wrong!  The market had a volatile but positive second quarter. Stock indexes have moved to record levels.

The market was buoyant despite many obvious worries. The trade war – and we now use the word ‘war” -- between the United States and China has no imminent resolution. The global economy is slowing. We have simmering geopolitical tensions that could escalate into full-blown conflict.

So what is going on? The market seems paradoxical. Bad news is greeted like good news. The Federal Reserve has announced its concerns for the U.S. economy in the face of trade tensions and the global slowdown. Investors are pleased with the Fed’s concerns because it means the Board is likely to reverse its policies on interest rates. The hikes seen in 2018 will now likely be turned around in 2019.

Amidst all this push and pull, we remain neutral at Hudson Advisors on the outlook for the market. We are neither bullish nor bearish. We expect the market to hold most of its year-to-date gains. But we think the opportunity for further expansion in 2019 is restrained. The market is at the highpoint of this historic 10-year cycle. In this environment, we seek selective growth opportunities for our clients while protecting them against potential volatility.

The Economy: Despite the worries, the fundamentals of the U.S. economy remain strong.  The 10-year expansion continues. Growth in the GDP was 3.1% in the first quarter and estimated at over 2.0% in the second quarter. Full-year GDP growth could be about 2.5%. Job growth remains strong and unemployment is at an historic low of 3.6%. Wage growth is sluggish but consumers are reasonably confident. Given the lagging wages, inflation remains well below the 2% level.

All that said, the concerns do exist.  Trade conflict is at the top of the list. Use of multiple tariffs by both the U.S. and China could hurt U.S. industries that buy or sell goods with China.   It could also hurt the Chinese who already were experiencing slower growth before the trade conflict intensified. The outlook in Europe is also troubled. The Brexit situation will have negative impacts for many years. Germany is also facing recession. It was these multiple concerns which prompted the Federal Reserve to reverse course and promise to cut interest rates if conditions warrant.  

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