Q2 2016 Capital Markets Update

Posted on July 12, 2016

We experienced a very quiet, low-volatility market for the first two months and 3 weeks of the 2nd quarter.  Then the Brexit happened!

For most of the quarter, equity investors continued the trend of climbing the wall of worry.  The quarter saw concerns over the job market (only 38,000 jobs created in May[1]), no growth in corporate earnings (for the 4th consecutive quarter), uncertainty over future Federal Reserve rate hikes, and anticipation of the British referendum over whether to stay in the European Union.  But in the midst of all these concerns equity markets slowly climbed higher.  It was not until June 24, when the surprise result came out of Britain to leave the EU, that the markets received a jolt of volatility.

Economic news in Q2 was mostly positive with strength in consumer and housing data offsetting the poor jobs number.  First quarter gross domestic product (GDP) saw an upward revision from 0.5% to 1.1% during the quarter[2].  The Federal Reserve continued the trend of projecting higher interest rates just beyond the horizon.  During Q1 2016, investors expected interest rates would increase between the April and June Fed meeting.  As Q2 dawned, markets expected an interest rate increase in either July or September.  Now as we enter Q3, the projection is for a rate increase in December at the earliest, and possibly not until 2017.

The effects of "Brexit" - June 24-30 2016 Market Returns
Source: Yahoo! Finance

The U.S. markets represented by the S&P 500 returned 2.46% for Q2, while foreign developed markets represented by the MSCI EAFE index returned -1.46% and emerging markets (MSCI EM index) gained 0.66%[3]. However, these muted returns belie the volatility witnessed in the last week of Q2.

On the fixed income side, the benchmark 10-year Treasury Bond saw its yield fall from 1.79% at the start of Q2 to 1.49% by the end[4].  The reduction in rates on intermediate and longer term bonds contributed to a 2.21% total return from the Barclays US Aggregate Bond index, while high yield bonds as represented by the BofAML High Yield Master II index returned 5.88%.  Bonds saw much of their return come in the last week of Q2 as the Brexit vote resulted in a flight to safety highlighted by buying of U.S. Dollars, and U.S. Treasury Bonds.

The events of the 2nd quarter serve to remind investors that a dull market can still produce unexpected and dramatic swings up or down.  It is important that portfolios are positioned appropriately for the risk tolerance and time horizon of the investor.  If the recent volatility has caused you to question your current asset allocation, our Investment Services team can help.  To learn more, contact a Pension Consultants Investment Consultant at 800-234-9584 or email investmentservices@pension-consultants.com.

[1] The Employment Situation–May 2016. Bureau of Labor Statistics, U.S. DOL, 6/3/16
[2]Gross Domestic Product: 1st Quarter 2016 (3rd Estimate), BEA, U.S. Dept. of Commerce, 6/28/16
[3] Index Returns as of 06/30/16, Morningstar.com
[4]TNX Historical Prices|CBOE Interest Rate 10 Year T No Stock. Yahoo! Finance
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