Quarterly Market Update – Q3 2016 By: Gabriel PotterMBA, AIFA® 2016.10.11

Key news stories

As always, problems generate more news than stability.  This quarter, the problems were overseas.  Britain was warned about the consequences of new deals with European Union after the unexpected Brexit vote of Q2, and subsequent replacement of David Cameron with Theresa May in July.  In other news, Japan may have reached a limit to how far its accommodative monetary policy and stimulus spending can fix fundamental problems in their economy.   European banks (e.g. Deutsche Bank) experienced unflattering headlines and delisting from indices as their capitalization levels fell by half.

Equities

The past year has been exceptionally good for the value side of the spectrum, both in large caps and small caps.  It is true that US growth stocks marginally, less than 1%, caught up to US value in the third quarter of 2016, but over the past year, this only partially catches up growth to value.  The continued price recovery for emerging markets and stability of commodity and currency prices lead to a great relative strength against developed international positions.

All index performance values are for previous quarter.

  • US Large Cap Growth - Russell 1000 Growth: 4.58%
  • US Large Cap Value - Russell 1000 Value: 3.48%
  • US Small Cap Growth - Russell 2000 Growth: 9.22 %
  • US Small Cap Value - Russell 2000 Value: 8.87%
  • Developed International Markets - MSCI EAFE: 1.73%
  • Emerging Markets - MSCI EM: 16.02%

Bonds

Fixed income in sovereign debt has become extremely challenging for income-driven investors after such good returns.  As a reminder, if bond prices go up, yields go down.  The majority of governments offer less than 1% yield.  Meanwhile, 10-year US treasury yields are negative for offshore buyers.  Hawkish voters in the Federal Reserve challenge Janet Yellen’s decision to leave rates unchanged, but do not have a majority yet.  The vote was 7-to-3 at September 21 FOMC meeting against a rate hike; it is unusual to present a split vote and hasn’t happened since 2005.

All index performance values are for previous quarter.

  • Barclays US Aggregate Bond: 0.46%
  • Barclays Capital US Intermediate Credit: 0.77%
  • Barclays Capital US Government: -0.25%
  • Barclays Capital US Gov’t/Credit Long Duration: 1.24%
  • Bank of America/Merrill Lynch High Yield Master II: 5.49%
  • Citi World Government Bond Index (non-USD): 0.60%

Alternatives

Oil prices seem to have stabilized in a $40-$50 range during the quarter.  Although production dropped down, with fewer oil rigs and hydrofracking operations, the excess inventory still limited price growth in Q3.  Further, the International Energy Agency (IEA) expects oil demand to grow more slowly next year given a “dimmer” macroeconomic outlook. 

  • Real Estate – DJ US Select REIT: -1.24%
  • Commodities - Morningstar Long Only Commodity: -4.89%
  • Inflation - Barclays US Treasury TIPS: 0.96%
  • Hedge Funds - Credit Suisse Hedge Fund: 1.51% (prior 3 months through 8/31/2016)

 

DISCLOSURES & DISCLAIMERS:

The information contained herein has been obtained from sources that we believe to be reliable, but its accuracy and completeness are not guaranteed.  Westminster Consulting, LLC reserves the right at any time and without notice to change, amend, or cease publishing the information.  It has been prepared solely for informative purposes.  It is made available on an "as is" basis.  Westminster Consulting, LLC does not make any warranty or representation regarding the information.  Without prior written permission from Westminster Consulting, LLC, it may not be reproduced, in whole or in part, in any form.  The information in this document is confidential and proprietary to Westminster Consulting, LLC including its business units and may be legally privileged. Any unauthorized review, printing, copying, use or distribution of this document by anyone else is prohibited and may be a criminal offense. Indices mentioned are unmanaged and cannot be invested into directly.  Past Performance does not guarantee future results.

 

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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