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Monthly Market Update - June 2016

July 13, 2016

Markets were tested by the UK’s vote to leave the EU but swiftly recovered most of their losses before the month ended. The S&P 500 was near flat with a return of 0.3%. International developed market stocks were hit hardest by the Brexit with losses across the board, but emerging markets gained 4.0%. Bond returns were very strong as yields declined substantially. REITs, commodities, and managed futures also had healthy returns in the 3‐5% range.

Economy

  • The final estimate of first quarter real GDP growth came in at 1.1%, which was above the previous estimate of 0.8%. The deceleration in growth from the fourth quarter reflects decreases in personal consumption expenditures and nonresidential fixed investment.
  • The year‐over‐year inflation rate remained at 1.1%. Increases in gasoline and energy prices for the month were offset by declines in the food index.
  • The private sector added 287,000 jobs in June, well above analyst forecasts of 180,000. The unemployment rate increased to 4.9% due to more workers entering the labor force.

Stocks

  • The S&P 500 Index returned 0.3 % and U.S. large value stocks gained 1.1%. Top performing sectors included telecommunications (+9.3%) and utilities (+7.8%).
  • International large stocks fell 3.4% and international small stocks dropped 4.9%. Among the worst performing countries were Spain (‐9.8%) and Italy (‐9.0%) as the Brexit fostered concerns that these countries and others could possibly leave the union.
  • Emerging markets were the bright spot in the stock market, posting a gain of 4.0% in June. Large gains in Brazil (+19.5%) and Indonesia (+9.6%) boosted the index.

Bonds

  • The 10‐year U.S. Treasury yield declined sharply, falling 35 basis points to 1.49%.
  • Intermediate‐term bonds returned 1.4% and TIPS gained 2.1%. International bonds were up 2.6%.

Alternatives

  • REITs jumped 4.8% and managed futures gained 3.9%.
  • Commodities were up 4.1% as precious metals produced double digit returns during the month.

2016 Mid-Year Update
The stock market has taken investors for a wild ride in the first six months of 2016. Following the worst start to the year in U.S. market history, stocks recovered most of their losses by the end of the first quarter, followed by a calmer second quarter until the Brexit shook things up. But by the time we reached the end of the second quarter, stocks had again recovered from the sell‐off. Here is where we sit at halftime:

Despite less than stellar stock market returns, there was a lot of good news on the fixed income and alternatives side of the portfolio. So far this year commodities are the top performer, up 13.3%. They were the beneficiary of a strong recovery in the Bloomberg Energy Index (+9.1%) as well as a surge in the Bloomberg Precious Metals Index (+27.1%).

The managed futures asset class has also had a great year so far (+6.3%), capitalizing on strong currency and interest rate trends.

Global REITs (+12.3%) performed well with declining interest rates and higher confidence that future rate hikes will be delayed more than markets had previously anticipated.

The S&P 500 is up 3.8% year‐to‐date and U.S. large value stocks are up 6.8%. The telecommunications sector (+24.8%) and utilities sector (+23.4%) are leading the pack thus far in 2016.

While developed international stocks were hit hardest by the Brexit and underperformed U.S. stocks, emerging markets proceeded upward, gaining 6.4% on strong returns in Brazil (+46.5%) and Russia (+20.6%).

U.S. intermediate‐term bonds returned 4.1% due to the sharp decline in interest rates, sparked by the Brexit vote and flight to safety by investors. International bonds (+7.7%) performed even better with several countries pushing interest rates into negative territory.

Sources: Bureau of Economic Analysis (BEA), Federal Reserve, Institute for Supply Management, JP Morgan, Morningstar Direct, Standard and Poor's, Wells Fargo, Yahoo! Finance, BofA Merrill Lynch, wsj.com

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