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IN THIS ISSUE

Mid-Year Update

The Uncommon Average

News at Towneley

New Towneley Team Member

Mid-Year Update

The first half of the year saw strong market performance

across all asset classes as client multi-asset portfolios have

enjoyed positive returns. While gains posted across the board,

the equities market stole the spotlight. Representing large

blend domestic equities, the Standard &Poor’s 500 Index

returned 7% in June despite a difficult May, resulting in

second-quarter gains of 4.2%. The Index posted an 18.5%

year-to-date return, despite modest inflation, significant trade

uncertainty, and a 3-month vs 10-year US Treasury inverted

yield curve, often considered a predictor of recession.

Year-to-date domestic equity market returns have not been

this strong since 1977; June’s domestic equity market

performance was the best since 1955.

International equities also joined the party with second

quarter 2019 returns for the MSCI All-Country World ex-US

Index of 3.0%; up 14% year-to-date. Commodities were one of

the few sectors sitting out the rally. The Bloomberg

Commodity Index posted a negative return of -1.2% in the

second quarter but maintained a positive year-to-date return

of 5.1%. Natural gas and cotton were the worst performers

during the quarter, but the precious metals funds held by most

clients flourished, as gold achieved a 8.4% second-quarter

return, bringing its year-to-date gain to 10%.

Risk assets have rallied in 2019 across the globe as central

banks are desperately trying to extend the business cycle and

are thereby distorting markets. US GDP in the second quarter

was 2.1% and estimated to be 1.2% for the third quarter (NY

Fed Nowcast). In addition to slowing US GDP growth, earnings

per share (EPS) of large domestic companies (as represented

by the S&P 500 Index) declined 0.3% during the first quarter of

2019; second and third quarter estimates are -2.6% and -0.4%,

respectively. Although forecasters expect earnings per share to

rebound 6.7% during the fourth quarter, predictions have

usually been premature and overly optimistic. Corporate

earnings per share grew 20% during 2018, reflecting both

ongoing economic growth, corporate tax cuts and hastiness to

buy back shares. This trifecta of conditions are not replicable

any time in the near future. Given the multiple inflection

SECOND QUARTER 2019 NEWSLETTER

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Second Quarter 2019

Exposure and, in doing so, took some gains off the

table and reduced some equity risk.

In addition to the total rebalance, we strategically

repositioned assets. For example, we lowered

duration and high-yield exposure in the taxable

bond segment. As longer-term interest rates have

declined, and the yield curve has become inverted,

shorter-term bonds now offer similar yields but

with much lower risk. With the intention of

reducing the interest rate risk in your portfolio, we

increased short-term bond exposure and decreased

intermediate (longer duration) taxable bond

exposure. The resulting shorter average duration

should help reduce interest rate risk in the fixed

income portion of your portfolio as interest rates

rise. High yield has been one of the best performing

segments in the portfolio and was up 10%

year-to-date through June 30. As the yield spread

between lower and higher quality corporate bonds

has narrowed, and as risk increases in the leveraged

loan market, we took gains and reduced exposure

to the high-yield segment.

Within the domestic equity portion, we frequently

run a regression analysis to monitor how much the

segment has in value/growth and large/mid/small-

cap stocks. Over time, the allocation has drifted

away from our desired balance between value and

growth. We took this opportunity to realign the

segment, so it is closer to a more equal weighting of

50% value and 50% growth.

Within international equity, we recently decreased

the index exposure and purchased a new fund from

MFS. The managed segment of the portfolio has

consistently generated positive alpha over rolling

three-year periods and we expect it to continue to

do well in this volatile environment. The MFS

international fund we added to the portfolio scored

high in our proprietary scoring system. Historically,

the fund has delivered above average returns

compared to its peers, has performed better in

down markets compared to its peers, and has a

consistent strategy and a strong management team.

points in today’s environment, it’s impossible to

ascertain how much longer an accommodative Fed

(and/or global central banks) can keep this cycle and

stock market on a positive course. But if the actions

like rate cuts and more QE follow Fedspeak, risky

assets could continue providing excess returns and

uncertainty across asset classes despite the

suggestions of valuation analytics.

Domestic bond yields have been declining for the last

three quarters, while Eurozone yields have been

consistently negative, with an estimate of $13 Trillion

in global negative-yielding debt floating about. Our US

Treasury yields this quarter:

These outsized downward moves in yield have

boosted fixed income returns. Representing the broad

US Bond market, the Bloomberg Barclays US

Aggregate Index returned 3.1% during the second

quarter and 6.1% year-to-date. Of course, most of

these interest rate moves have been reinforced by

preemptive expectations that the Fed will cut the

federal funds rate this year. Most recent forecasters

expect a total rate reduction of 75 bps in 2019.

Thoughts from Towneley

Since we last rebalanced most client portfolios 16

months ago, domestic equity indexes have continued

to reach new highs, with cumulative gains for the

Standard & Poor’s 500 Index of 17%. As the markets

have become more volatile and expensive, in July we

rebalanced portfolios back to their target objectives

by trimming domestic equity positions and adding to

fixed income and international equity positions. These

moves brought portfolios back to their target

Maturity Change in Yield Quarter End Yield

1 year T-bill (48 bps) 2.18%

2 year T-note (52 bps) 1.92%

5 year T-note (47 bps) 1.76%

10 year T-note (41 bps) 2.00%

30 year T-bond (29 bps) 2.52%

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Second Quarter 2019

The Uncommon Average The US stock market has delivered an average annual return of around 10% since 1926.1 But short-term results

may vary, and in any given period stock returns can be positive, negative, or flat. When setting expectations, it’s

helpful to see the range of outcomes experienced by investors historically. For example, how often have the stock

market’s annual returns aligned with its long-term average?

Exhibit 1 shows calendar year returns for the S&P 500 Index since 1926. The shaded band marks the historical

average of 10%, plus or minus 2 percentage points. The S&P 500 Index had a return within this range in only six of

the past 93 calendar years. In most years, the index’s return was outside of the range—often above or below by a

wide margin—with no obvious pattern. For investors, the data highlight the importance of looking beyond average

returns and being aware of the range of potential outcomes.

In US dollars. S&P data © S&P Dow Jones Indices LLC, a division of S&P Global. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Past performance is no guarantee of future results. Actual returns may be lower.

TUNING IN TO DIFFERENT FREQUENCIES

Despite the year-to-year volatility, investors can potentially increase their chances of having a positive outcome by

maintaining a long-term focus. Exhibit 2 documents the historical frequency of positive returns over rolling periods

of one, five, and 10 years in the US market. The data show that, while positive performance is never assured,

investors’ odds improve over longer time horizons.

In US dollars. From January 1926–December 2018, there are 997 overlapping 10-year periods, 1,057 overlapping 5-year periods, and 1,105 overlapping 1-year periods. The first period starts in January 1926, the second period starts in February 1926, the third in March 1926, and so on. S&P data © S&P Dow Jones Indices LLC, a division of S&P Global. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Past performance is no guarantee of future results. Actual returns may be lower.

Exhibit 1. S&P 500 Index Annual Returns 1926-2018

1 As measured by the S&P 500 Index from 1926–2018.

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Second Quarter 2019

News at Towneley

New Towneley Team Member

Martin Standish Portfolio Manager

Martin, “Marty” Standish is the

newest member of the Towneley

team. “Working for a firm that

you’re truly proud and confident to

talk to anybody about, means

everything,” says the 30-year wealth management

professional who brings to Towneley an extensive

background in investment management within a bank

trust and private registered investment advisor

environment. Experienced in working with both

institutional and private clients, Marty enjoys the

diversity of his work at Towneley, including research,

portfolio management, client relations, and leading

presentations. He describes himself as “passionate”

about the industry, the relationships he has the

privilege of making, and about ultimately helping

people and institutions meet their goals. “To get

there,” he says, “you have to be passionate about

reading, studying the markets, and rolling up your

sleeves to go the extra mile.” Prior to joining Towneley,

Marty provided holistic management to high net worth

families, foundations, and endowments at firms

CONCLUSION

While some investors might find it easy to stay the course in years with above average returns, periods of

disappointing results may test an investor’s faith in equity markets. Being aware of the range of potential outcomes

can help investors remain disciplined, which in the long term can increase the odds of a successful investment

experience. What can help investors endure the ups and downs? While there is no silver bullet, understanding how

markets work and trusting market prices are good starting points. An asset allocation that aligns with personal risk

tolerances and investment goals is also valuable. By thoughtfully considering these and other issues, investors may

be better prepared to stay focused on their long-term goals during different market environments.

Source: Dimensional Fund Advisors LP. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. Diversification does not eliminate the risk of market loss. All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

including Macquarie Funds Management, Morgan

Stanley, and Union Bank.

Reflecting on Towneley’s strong values and ethics,

Marty says he’s a strong advocate of the firm’s core

service model. “It’s all about our fiduciary

responsibilities to our clients, which is something all

of us take very seriously. You don’t see that every

day in business, which makes working with the

Towneley team an opportunity that I’ve been

seeking for quite some time.”

Towneley Capital Management

Office: 23197 La Cadena Drive, Suite 103

Laguna Hills, CA 92653

Phone: 800-545-4442

Email: info@towneley.com

Website: www.towneley.com