Global equity markets advanced 5.4% during the third quarter, as measured by the MSCI ACWI Index, outperforming the 0.8% return for the Barclays Global Aggregate Bond Index. Stocks rose early in the quarter with lessened fears over UK’s vote to leave the European Union. Accommodative policy from global central banks and low bond yields also provided support for stocks. Uncertainty over central bank policy contributed to market volatility during September, but eased as the US Federal Reserve did not raise rates at its policy meeting. For the first nine months of 2016, global equities returned 7.1% while global bonds gained 9.9%.
The S&P 500® Index of large cap US stocks rose 3.9% for the quarter, but trailed global equities. Most of the gains were made during July as diminished global risks and positive employment data helped drive stocks higher. The technology sector surged 12.9% during the quarter, lifted by Apple and its new iPhone release. Financial stocks rebounded on the prospect for higher rates and gained 4.6%. The more defensive and higher dividend sectors were more sensitive to the weakness in bonds, with notable declines in Utilities (-5.9%), Telecoms (-5.6%), Consumer Staples (-2.6%) and Real Estate (-2.1%).
The MSCI EAFE Index of international developed stocks outperformed US stocks with a 6.5% return for the quarter. Japan rose 8.8%, lifted by strength in the yen, as the Bank of Japan continued its policy efforts to stimulate growth and counter deflation. Broader Europe rose 5.5% despite concerns surrounding Germany’s Deutsche Bank, with it facing a $14 billion fine from the US Justice Department over sales of mortgage securities. UK stocks rose 4.0% with diminished fears over Brexit and the pound’s depreciation boosting exports. Emerging markets gained 9.2%, on stabilization in commodity prices, with Brazil and Russia adding to strong gains for the year.
In fixed income, the Bloomberg Barclays US Aggregate Bond Index returned 0.5% during the quarter as bond yields rose modestly. The 10-year Treasury yield reached a historic low of 1.36% in July, but retreated and ended the quarter at 1.60%. Longer-dated maturities were more sensitive to the rise in rates and saw small declines. Investment grade corporate bonds and high yield bonds benefited as credit spreads tightened, with the high yield sector up 5.6% for the quarter. International bonds benefited from strength in foreign currencies versus the dollar, particularly the Japanese yen, as the Barclays Global Aggregate ex-US Bond Index rose 1.0%.
The US economy expanded at a 1.4% annual rate during the second quarter of 2016, up from 0.8% in the first quarter. The improved GDP reading was largely driven by a 4.3% increase in consumer spending. More recent data suggests a slowing in expenditures, particularly auto sales, but analysts expect this to be countered by higher business and inventory investment. The Federal Reserve of Atlanta is projecting economic growth of 2.2% for the third quarter. Corporate earnings are expected to decline 2.1% from the prior year, but excluding the Energy sector, earnings are forecast to expand 1.2%.
The Federal Reserve left short-term rates unchanged at the July and September FOMC meetings. Fed officials indicated that a rate increase could come before year-end, reflective of an improving economy and employment picture. The unemployment rate remained at 4.9% in August, within range of the Fed’s expectation of full employment. The Consumer Price Index (CPI) inflation rate rose 1.1% over the 12 months through August, up from 0.8% in July. The core CPI measure which excludes food and energy was up 2.3%, which along with other Fed measures, indicates a closer path toward the Fed’s 2% preferred target.
The third quarter of 2016 was characterized by many uncertainties including: the impact of Britain leaving the European Union, the timing of a Federal Reserve rate hike, and the US presidential election. Markets were jolted in June by the surprise outcome in favor of “Brexit”, but rebounded in July with the decision in place and as fears subsided. Market volatility was abnormally low for much of the quarter, with investors cautious in view of a seven-year bull market in stocks and historically low bond yields. Notably, the S&P 500 saw no daily moves of more than 1% for a two-month period from July to early September.
Volatility returned in September, with the European Central Bank’s surprising decision to not expand its stimulus program and as comments from US Federal Reserve officials indicated a potential rate hike. This triggered a broader sell-off in stocks and bonds. Markets were reassured when the Fed maintained its accommodative stance and left rates unchanged at the September 20-21 FOMC meeting. Nonetheless, the timing of a rate increase remains uncertain, with the US Presidential election quickly approaching.
Election years historically have seen a divergence in stock market results based on the election outcome. US stocks have tended to rally in years when the incumbent party wins, with flat to more negative results when the incumbent party loses. In terms of portfolio positioning, broader-based portfolios can see potential benefits from core allocations to stocks and bonds, with tactical strategies providing additional flexibility to respond to changing market risks. Diversifying and alternative strategies such as managed futures can also play an important role, with performance less tied to traditional asset classes. As the market faces larger uncertainties, well-diversified portfolios that combine multiple strategies can seek opportunities across a range of outcomes.
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Summit Group of Virginia
This material was prepared by Asset Mark and does not necessarily represent the views of the presenting party, nor Ameritas Investment Corp. (AIC). Asset Mark is not affiliated with the presenting party or AIC. This material represents an assessment of the market environment at a specific point in time and is not intended to predict future results. The performance mentioned herein is past performance and is not indicative of future results. All information is gathered from sources believed to be reliable; however we make no representation as to its completeness or accuracy. Market indices are unmanaged and cannot be invested into directly. Neither the presenter nor AIC are providing tax or legal advice. Please consult your tax advisor or attorney regarding your situation.
 Index returns from FactSet
 Source: Viswanatha, Aruna. “Deutsche Bank Is Asked to Pay $14 Billion to Resolve US Probe Into Mortgage Securities.” WSJ (2016, September 16).
 Source: Bureau of Economic Analysis
 Source: FactSet
 Source: Bureau of Labor Statistics
 Source: Davis, Ned. “Election Sentiment”. Ned Davis Research (2016, August 31).