As we reflect on the second quarter and look to the back half of the year, we continue to monitor the unexpected stamina of the US economy despite the central bank’s extended campaign of monetary tightening. Largely, Q2 has been a continuation of market return divergence between large cap technology companies and the rest of the market that we spoke about last year.
While speculation about when the Federal Reserve will look to first cut rates has remained center stage, we continue to think about the implications of the underlying economy and market in that scenario. The Fed’s dual mandate looks at both employment and price stability. Employment figures remain strong, with unemployment at 4.0%, significantly below historical averages. Yet, indications of financial strain are surfacing, particularly among less affluent consumers as excess savings have nearly been depleted. Inflation, while no longer accelerating, has proven to be stubborn. We believe the Fed will at some point get inflation close to their 2.0% target, but we believe that to accomplish this there will be a slowdown in the economic data, which has thus far been sporadic.
The current equity portfolio has kept a bias toward larger capitalization companies and tilt towards growth given their stronger balance sheets with fixed rate debt and earnings projections. With that said we have continued to methodically cycle into the value part of the market and have continued to add exposure to the mid and small cap part of the market that from a valuation perspective we find attractive. Within fixed income we remain invested primarily in public investment grade credit and private direct lending as this barbell approach allows for higher current income while remaining defensively positioned invested with highly rated companies in the public market and sitting highest in the capital structure on the private side.
The potential for both economic downturns and sustained growth persists, influenced by consumer behavior and health, investment in artificial intelligence and infrastructure, and fiscal and monetary policy. With a divergence of possible outcomes, we continue to believe that by investing across a diversified portfolio allows us to weather the storm and be reactive whenever volatility reenters the markets.
Information in this commentary is gleaned from third-party sources, and while believed to be reliable, is not independently verified. This content is not intended to be tax, legal, investment, or fiduciary advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material may not be suitable for all investors. Bernardo Wealth Planning recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. Past performance does not guarantee future results.