Quarterly Performance Update
After Shaky Start, Risk Ruled
Third Quarter 2016
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Central banks came to the rescue, calming investor nerves after the U.K.’s vote to exit the European Union (EU), known as Brexit, rattled financial markets in late June. The Federal Reserve (Fed) left rates unchanged, while other central banks increased their stimulus efforts. These actions helped support stocks and bonds and swayed investor risk preferences.
The third quarter got off to a stormy start, with the shock of the June 23 Brexit vote still clouding the global financial markets. In addition, familiar themes of weak global growth, low inflation, and rate hike speculation in the U.S. soured investor sentiment. But the fears that gripped the markets early in the quarter quickly faded as central banks regained the spotlight. Expectations for additional central bank stimulus generally influenced financial market performance throughout the quarter. Risk returned to favor, as small-cap U.S. stocks, emerging markets stocks, and high-yield bonds rallied, outperforming their higher-quality, less-risky counterparts.
Reflecting the mixed nature of U.S. economic releases, Fed sentiment shifted from dovish to hawkish and back to dovish during the quarter. And financial markets responded accordingly. Speculation that the Fed would hike rates in September drove U.S. Treasury yields modestly higher and returns fractionally lower for the quarter. But in the end, the Fed left its rate target unchanged, citing continued weakness globally and a low inflation backdrop as reasons to keep rates "lower for longer." The broad market (S&P 500® Index) advanced +3.85%, while small-cap stocks were even stronger, gaining +9.05 (Russell 2000® Index). Investment-grade bonds advanced +0.46%, driven by a +1.41% gain in corporate bonds, according to Bloomberg Barclays. Reflecting investor demand for yield, high-yield corporate bonds returned +5.55%, according to Bloomberg Barclays.
Better-than-expected corporate earnings and modestly improving economic data—particularly in the U.K.—along with additional stimulus from the Bank of England and the Bank of Japan helped drive non-U.S. developed market stocks higher. The MSCI EAFE Index gained +6.43%, while emerging markets stocks soared +9.03% (MSCI Emerging Markets Index). Among non-U.S. bonds, European bond markets were relatively strong, led by the U.K. and peripheral markets. Investor demand for yield led to outperformance among non-government bonds and emerging markets securities. The U.S. dollar was mixed but generally lower against most major foreign currencies, which lifted non-U.S. bond returns for unhedged U.S. investors.
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Source: Bloomberg Index Services Ltd
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