Domestic equity markets surged higher again in Q2 despite ongoing complications surrounding the continued conflict in Iran amongst other macro indicators and events.
On a seemingly daily basis negotiations to end the conflict parlayed into declarations of U.S. victory and then promptly back to continued aggression. Adding a dose of volatility in addition to not only higher, but what many are now referring to as ‘sticky’ inflation as the conflict grinds on. As concerning is the portion of U.S. debt held by the public exceeding Gross Domestic Product (GDP) for the first time since World War II (except for a brief period during the COVID-19 pandemic). And GPD growth in both Q1 and Q2 measuring well below the historic average of approximately 3.15%. A somewhat gloomy outlook…
And yet the S&P 500 index as well as a vast majority of our equity and blended models, both the Tactical Allocation Portfolio (TAP) and Sector Equities (SEC EQ), beat their respective benchmarks in Q2 and YTD. Driven again primarily via higher risk sectors including Information Technology, Communications and Consumer Discretionary amongst others. The glut for Artificial Intelligence systems, supply chain and infrastructure persisted with chip makers leading the way. There were notable rotations away from risk but ultimately equity markets recovered, ending Q2 near an all-time high.
We have begun fielding calls here and there from our investors worried about what lies ahead. The short answer is we do not know. And yet trust in the approach we have built. One with a heavy tilt towards risk-management which of course we highlight here, as well as in our Weekly Market updates often. When we rolled out our enhanced approach early in Q1 it included additional risk-management indicators specifically for this type of market environment.
We’re certain you’ve noticed an above average number of trades, the majority have been fractional decreases to the allocation or size of a position based on our reading of market volatility. Most trades are capturing profits while at the same time limiting exposure (risk). This typically occurs prior to our traditional exit strategy providing what we refer to as ‘gap down’ protection. Similarly in a rising market environment the inverse indicator allows us to embrace risk, often sooner than was traditionally coded into adding a new position to the models. Protecting your bottom line is our primary focus, the enhancements to the models are working, and as always, we encourage you to stay the course.
Generally speaking, we are pleased yet recognize there is a lot of 2026 still to come. We will continue to grind through this unique environment and have confidence regardless of what conditions dictate the second half of the year. We value each relationship and welcome your calls, comments and ongoing communication.