Stocks continue on their move higher, with earnings propelling prices to new record highs. Many of the world’s largest companies are showing strength despite the growth scare of last quarter, with margins continuing to expand and profits mostly in line with estimates. The Federal Reserve board met this week to decide on the direction of monetary policy, with their decision leaving mixed feelings for investors. Meanwhile, bond yields are moving ever lower, as the “lower-for-longer” message from the Fed gives confidence to fixed income investors. The ongoing trade negotiations showed no breakthroughs this week, as a lasting deal remains elusive for now.

The Federal Reserve’s decision to leave rates unchanged was no surprise to investors, who anticipated a hold on the rate hike campaign of the last year. However, the minutes released from the meeting and the press conference mentioned ongoing concerns about the lack of inflation despite robust growth in the economy and jobs. The emphasis on positive data points led many to question the conviction of markets that the Fed is permanently on hold and may even reduce rates this year. It became clear that Jerome Powell’s mantra of data dependency reigns for now, and that each Fed meeting moving forward will be a “live event” where a decision could be made in either direction, with optionality intact. Investors seemed to mostly look past their moves for now, without much clarity on where we head from here.

On the economic front, data points remain mixed. Labor figures, housing, and consumer sentiment are moving in the right direction, while inventories, increasing credit losses for banks, and weakening manufacturing activity indicate potential trouble ahead. Particularly encouraging was the recent productivity reading, which showed the highest increase since 2014. If the amount of output per worker can continue to grow without stoking inflation, rates can remain low for the foreseeable future, adding fuel to the current market rally. Overall, the data does appear to be firming more than expected, though any trouble from the China negotiations or unforeseen geopolitical flare ups could quickly reverse ongoing positive sentiment.

As of now, we are maintaining the current allocations and have made some small shifts to reflect solidifying strength in fundamentals. The possibility of near-term volatility remains elevated, as Fed policy stays uncertain, trade risks in Asia and Europe are unclear, and geopolitical outcomes are increasingly tied to market sentiment. If there is anything we have learned in the past several years, it is that increasingly, asset correlations globally are stronger and that policy decisions by central bankers and politicians can have outsized effects on markets at the drop of a tweet. Our goal for now is protect the gains from this year while balancing potential tail risks and opportunities down the road.