Market Overview – Markets move past Brexit!
World Capital Markets quickly reversed after a knee-jerk sharp two day sell off from Friday, June 24th to Monday, June 27th in the aftermath of the UK vote to exit the European Union. However, the DJIA average recouped the two-day 871-point route ending the quarter plus 790 points in the final four trading days. Including July 1st, the US markets had their best week of the year. However, the story of the 2nd quarter and that of 2016 thus far is the action in the bond markets. The 10-year US Treasury note briefly fell below its lowest level ever at 1.385% on the first day of trading in the third quarter. The market is now firmly of the belief that Brexit collateral damage uncertainty will exert pressure on world central banks to pump even more stimulus to world economies. Brexit has put a downward trajectory on the British Pound sterling, and sparked additional demand for US Treasuries and the US dollar. Gold has caught a bid. Recent events suggest that The Federal Reserve may remain in a holding pattern as well.
Fixed Income2ndqtr2016-graph1
The 10-year US Treasury’s benchmark returned 7.97% during the first six months of the year and the 30-year Treasury bond returned 16.93%. Municipal bonds returned 4.33 % and high yielding non- investment grade rebounded from a poor 2015, advancing 9.06%. The yields on the
10-year Treasury note and 30-year Treasury bond on June 30th were 1.47% and 2.29% respectively.
S&P Midcaps were the best performing group of the US Market recording an advance of 3.55%.
Not surprisingly, International developed and emerging markets lagged and had negative returns during the second quarter. Utilities, consumer staples and telecoms were the best performing US sectors as investors seeking income and stability bid their shares higher. Including dividends, the S&P 500 returned 3.84% during the first 6 months of 2016.
Gold closed the quarter at $ 1,318.40 per ounce and advanced 6.82% during the quarter. Beginning the year at $1,060.30, Gold is positive 24.34% year to date after suffering three consecutive negative calendar years. Oil at $48.33 per barrel has rebounded during 2016 and is up 30.5% from January 1 price of $37.04 but still below $58.33, which was the trading price a year ago.
2ndqtr2016-graph2Effective September 17, 2016, Real Estate Investment Trusts will be given their own S&P Sector Index. According to Barron’s magazine, “The Sector will include 27 REITS and 1 Real estate Operating Company and will rank as the 9th largest in the S&P with a market value of roughly $535 Billion.” The sector was previously lumped in with Financials such as investment banks. Because REITS are sensitive to interest rates, you may want to increase or consider an allocation as it currently appears that the Federal Reserve may be reluctant to raise rates in the near term due to recent geo-political developments related to Brexit. REITS have handily outperformed the S&P 500 over the last 20 years. We would expect this re-characterization to stimulate flows into this category. The Vanguard REIT ETF (VNQ) currently has an annualized yield of 3.98%.
In developing your playbook for the remainder of 2016, pay close attention to the US jobs report scheduled for release July 8th. A report of 200,000 jobs or above could signal that talks of impending recession will not be a near-term occurrence. A report similar to last months could suggest trouble ahead. Expect both US major political parties to pick equally polarizing vice-presidential candidates and expect more volatility as we approach the November polling. Compared to the rest of the US market, which seems to be fairly to fully-priced in an historical basis, financial stocks such as the big US banks seem reasonably priced with greater upside potential should rates begin to rise again. Expect more mergers and acquisitions as companies seek bargains and cost cutting synergies in a quest to grow earnings in a low global growth environment. We plan to maintain a US bias and larger cash balances heading into the 3rd quarter 2016, as there seems to be more unknowns on the International front.
We wish you a relaxing, enjoyable and safe summer.
Respectfully submitted,