Q3 2016 Economic and Market Perspective

The 3rd Quarter began with a sharp upward move in risk assets, a surprising development given the UK’s decision to leave the E.U. at the end of the 2nd Quarter of 2016. For the most part, these gains were maintained, and July and August were both characterized by exceptionally low levels of volatility. Investors spent most of the summer confident that growth would remain slow-but- steady, and that monetary policy would remain accommodative. Although some of these gains were given back in September, due largely to concerns about the trajectory of monetary policy, equities generally performed well.


The S&P 500 tacked on another 3.3% in the third quarter to push its overall year-to-date gain up to 7.84% on a total return basis and has officially climbed higher now for seven straight months. The NASDAQ has gained 5.88% YTD and the Dow Jones has gained 4.81% YTD. This shows how a historic election, a near fatal crash of Deutsche Bank, and even Brexit have so far barely phased the markets over the long-term.

The S&P Financial Sector lagged in Q3 as the Federal Reserve chose not to raise interest rates in September while Wells Fargo and Deutsche Bank found themselves in legal trouble.

The Russell 2000, a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index, has gained 11.46% YTD. In comparison, the Russell 1000, a stock market index that represents the highest ranking 1000 stocks in the Russell 3000, has gained 7.90% YTD. “Small- caps had been beaten down a lot, underperforming large-caps for a while, which made them more attractive to investors concerned with high valuations,” said Kim Caughey Forrest, senior analyst and portfolio manager at Fort Pitt Capital Group.

The MSCI Emerging Markets Index did remarkably well gaining 8% in Q3, up 16.36% YTD, in part due to China and the global economy stabilizing. “So, even though we’re at a slower pace of growth today than we were a few years back, many emerging markets are now improving off of a very low base,” stated Dirk Hofschire, senior vice president at Fidelity Asset Management, “and, in the near term, the markets care the most about whether conditions are getting better or getting worse, and now they are actually getting quite a bit better in a number of emerging economies.” The MSCI EAFE Index, designed to represent the performance of large and mid-cap securities across 21 developed markets, excluding U.S. and Canada, rose 5.91% in Q3, up 2.75% YTD.

Treasury yields rose in September for a second-straight month, logging the largest two-month gain since November 2015, on growing market expectations that the Federal Reserve could raise interest rates by the end of the year. The 10-year and 30-year treasury ended the third quarter at 1.60% and 2.32%, respectively. U.S. high-yield bonds have gained 14.7%, poised for their best annual return since 2009. Investors have been drawn to the higher yields than on “safer” U.S. Corporate bonds. At the end of the 3rd Quarter, the High Yield Corporate Bond ETF was yielding 5.07% while the Investment Grade Corporate Bond ETF was yielding 3.05%.

The overall commodity sector consisting of 29 of the primary commodities that trade on U.S and U.K. exchanges moved 1.89% lower for the three months that ended on September 30 but is 10.58% higher in 2016. The U.S. dollar is a major factor when it comes to commodity prices as it tends to have an inverse value relationship with raw material prices. Commodities were mixed even though the dollar index fell by 0.85% over the quarter.

The price of a barrel of oil, though well up from the February low of $26, has been unable to stay above the $50 mark, but last week both United States and Brent crude closed in on that threshold, finishing at $48.24 and $49.06, respectively. The surge came after the Organization of the Petroleum Exporting Countries (OPEC) members, at an informal session in Algiers, announced that they would institute a modest production cut at their next meeting in Vienna on Nov. 30

With the looming U.S. presidential election and the final Fed meeting of the year in December, our expectation is that markets will continue to be volatile. So far, we continue to sit and wait for the Fed to raise interest rates. Yellen and company have carefully worded their press statements but the details will be in the data this fourth quarter. The fact there were three dissenters in the September vote show how divided the group is on the state of the economy. The Fed Funds futures market is pricing in about a 62% chance of a hike in December, but the Fed is likely waiting for a little more confirmation from the next jobs, unemployment and wage growth reports before pulling the trigger.

If you have any questions about your portfolio investments or the current state of the markets, please do not hesitate to reach out at any time




(https://am.jpmorgan.com/blob- gim/1383280029130/83456/weekly_market_recap.pdf)






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