Quarterly Market Update – Q2 2016 By: Gabriel PotterMBA, AIFA® 2016.07.11

Key news stories

Last year, the fears of the Greek exit from the European Union ended up with a lot of smoke but no fire.  Last month, without a lot warning smoke, Britain set off a fire when it voted for a referendum to withdraw from the EU.  The economic impacts will take years to be felt fully, since the UK has two years from its formal submission of Article 50 to withdraw, but some shockwaves are already obvious with resignation of Prime Minister David Cameron, the shakeup of leaders in Labor and the U.K.I.P. party, the downgrade of British debt by S&P and Moody’s, and so on.

Equities

Value equities continue to extend their lead over growth equities this year as today’s free cash flow trumps expectations for tomorrow’s growth prospects for investors.  The strained valuations on US small cap growth stocks have not quite broke even for the year although other US equities are in positive territory.  The bad news is that developed markets capped off a sub-par year with a harsh June, due in no small part to the nascent tribulations of the Brexit.  Emerging Markets benefitted from fundamental divergence from EU internal economic forces, a hard-landing on key commodity prices, and a technical recovery from potentially oversold positions in 2015.

All index performance values are for previous quarter.

  • US Large Cap Growth - Russell 1000 Growth: 0.61%
  • US Large Cap Value - Russell 1000 Value: 4.58%
  • US Small Cap Growth - Russell 2000 Growth: 3.24%
  • US Small Cap Value - Russell 2000 Value: 4.31%
  • Developed International Markets - MSCI EAFE: -1.46%
  • Emerging Markets - MSCI EM: 0.66%

 

Bonds

There was not a great deal of difference, maybe just a 1% or so, between traditional US fixed income assets of core government or investment grade credit.  The much bigger story was the plummeting yields, with 30 year and 10 year yields hitting record lows in the quarter (and in the first few days of July).  Aggressively accommodative monetary policy from fearful central banks across the globe continues to put downward pressure on yields. When bond yields fall, prices rise.  Longer maturity bonds, US government & credit, are both up about 14% year to date. 

All index performance values are for previous quarter.

  • Barclays US Aggregate Bond:  2.21%
  • Barclays Capital US Intermediate Credit: 2.12%
  • Barclays Capital US Government: 1.24%
  • Barclays Capital US Gov’t/Credit Long Duration: 6.95%
  • Bank of America/Merrill Lynch High Yield Master II: 5.88%
  • Citi World Government Bond Index (non-USD): 3.41%

Alternatives

Echoing the strength in US value over US growth stocks, investors put a high premium on REITs which have the ability to generate income and pass through immediate cash-in-hand back to investors.  After a very rough 2015, key commodity prices seem to have found a modicum of stability and a partial price recovery.

  • Real Estate - FTSE NAREIT All REITs:  7.41%
  • Commodities - Morningstar Long Only Commodity TR: 15.72%
  • Inflation - Barclays US Treasury TIPS: 1.71%
  • Hedge Funds - Credit Suisse Hedge Fund: 0.98% (prior 3 months through 5/31/2016) 

 

 

 

 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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