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NovaPoint: 3Q Market Update

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The tug-of-war between the negative impact of a standoff in U.S.—China trade and the positive impact of the Federal Reserve being first patient and then Dovish, caused volatility during the second quarter with a steep decline in May followed by a steep recovery in June. Investors grew impatient with the Fed’s “patient” stance as the progress with China deteriorated in May. In early June, Fed Chairman Jerome Powell indicated the Fed would take appropriate action to maintain expansion of the economy in the face of global trade uncertainty. This Dovish sentiment coupled with low inflation and a weaker May employment report led investors to the conclusion that a Fed rate cut was upcoming.

Optimism about a potential rate cut rallied stocks in June with the S&P 500 up 7%. The announcement that President Trump would meet with Chinese President Xi at the G20 Summit at the end of June also contributed to the positive sentiment.

We believe the tug-of-war may remain. The China trade standoff is not likely to be resolved soon. In the interim, the Fed continues to be supportive of economic expansion and inflation remains below target.

Our equity holdings are well diversified across sectors. We favor high-quality stocks with a demonstrated track record of increasing dividends as we believe they are more durable through economic cycles.

For clients with fixed income holdings, we have kept our tilt toward higher credit quality. The flattening and inversion of the yield curve helped the allocation we made to longer duration fixed income earlier in the year. We have limited exposure to non-investment grade bonds.

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