During the second quarter the equity market as measured by the S&P 500 Index had a total return of 3.4%, bringing the year-to-date total return to 2.6%. Second quarter performance reflects the continued low-inflationary expansion of the U.S. economy and the attendant growth in corporate profits. All else being equal, we would expect these trends to persist. The question, of course, is whether “all else is equal.”

The biggest potential change facing the economy is the evolving rhetoric surrounding trade, the imposition of tariffs and retaliatory tariffs, and the potential for a wider trade war. At this point, it is impossible to predict whether our trade disputes will devolve into a full-blown trade war or, alternatively, if they will be resolved amicably and with potentially lower tariffs. A lot is at stake. So let us lay out best-case and worst-case scenarios.

The best-case scenario is that the administration’s bellicose trade rhetoric is simply a negotiating tactic and that all sides will ultimately work toward a fair-trade outcome that could entail even lower tariffs than those currently in place. This would allow the long economic recovery to extend further as inflation would likely remain in check and corporations could rationally plan their capital spending. This favorable outcome would likely drive the stock market higher.

The worst-case scenario is that U.S. imposed tariffs are not withdrawn, but expanded, causing our trading partners to impose increasingly higher retaliatory tariffs. This would have widespread repercussions, ultimately increasing inflation and slowing global growth. It would disrupt supply chains, which have grown increasingly complex in the global economy, and would almost certainly cause corporations to defer investment spending, which is finally on the mend. As with the best-case scenario, we do not think that the worst-case scenario is fully discounted by the stock market.

Given the very real uncertainty surrounding the trade issues and given the unpredictability of the outcome, we are pursuing the overriding goal of owning companies whose fundamental outlooks are more company-specific or idiosyncratic and less dependent on any particular trade outcome. As an example, we believe that digitization is increasing throughout the economy and will continue to do so whether we enjoy excellent or terrible trade relations with our partners. In order for digitization to grow, companies need sophisticated data centers. We own a company, Digital Realty Trust, which owns and operates data centers. It is a REIT that pays close to a 4% yield that may grow at 7-9% over time. In a similar vein, we have positions in Google and Facebook, two companies clearly riding the digital wave.