Q2 2016 Economic / Market Recap
We’ve all heard the saying, “the calm before the storm.” The 2nd Quarter was more like the calm after the storm. After the 1st Quarter was full of market gyrations, panic and multiple dramatic headlines, the 2nd Quarter resembled a commercial airline in a holding pattern. US markets did not noticeable advance nor fall rather they experienced a relatively smooth ride.
Over the first half of 2016, US markets (i.e., S&P 500) are up roughly 3.8%. However, non-US markets developed markets (i.e. Europe and Japan) are still stuggling and are down about 4% for the year (as measured by the European/Developed Asia ETF – EFA). Emerging Markets continue to demonstrate some resolve from their 2015 difficulties and are up about 6% over the first six months (as measured by the Emerging Market ETF – EEM). Add it all up and a diversified global stock market portfolio would be essentially flat for the first six months of 2016.
The brightest start in financial markets over the last six months have been the often boring and misunderstood bond market. So far in 2016, the US Bond Market is up a little over 5%. The primary reason for the strong performance in the bond market is due to the seemingly unthinkable, interest rates continue to fall. Their returns may appear boring. They may not be as easy to understand as stocks. Many “financial gurus” may be screaming that the bubble is about to pop on bonds. However, as we have said consistently over the last several quarters, bonds do have a place in clients’ accounts.
Q3 2016 Outlook
There were many topics that made headline news during the 2nd Quarter.
US GDP was less than stellar. The Brits decided that they would be better off on their own than with their European brethren. Central Banks continued to keep markets on pins and needles.
If anyone has a notion that the 3rd Quarter is going to be any different they are probably fooling themselves. There will be more headline news stories. In the moment, it will seem big and important. There will be people telling you, me and anyone else that will listen that “this time is different.” We don’t know what the stories will be in the 3rd Quarter. However, we would suggest to clients that it is best to ignore most of that stuff. As we have said before, focus on your summer vacation plans, spending time with your family, your job or your hobby.
Interest Rate Increase Update
As we mentioned above, interest rates continued to fall during the 2nd Quarter. Amazing, the US 10-Year Treasure Bond is currently below 1.4%, an all-time historic low. Part of the reason is that Central Banks around the World have continued to be extremely accommodating. The Federal Reserve stated in December 2015 that they planned to increase interest rates 4 times in 2016. Well, they haven’t hiked once in 2016 and the currently probability of one interest rate hike in 2016 is hovering around 23% in December. In our opinion, it is likely that the Federal Reserve won’t hike at all until sometime in 2017.
Economic Growth Update
As we have written and discussed at length this year and last year, for that matter, the US economy continues to prove to be fairly stable. Don’t get us wrong, we are not arguing that our economy is super strong and/or about to really take off. However, we do not appear to be hang by a thread. Various economists that we pay attention to continue to preach that the US economy is likely to grow around 1.5%-2.5% in 2016.
Difficult to have a sustained market crash (i.e., 2008) without a recession. Difficult to have a recession when the economy is growing. With that in mind, we would continue to suggest that there are certain areas of the the stock market that are cheap relative to their recent highs. In spite of oils recovery over the last 2-3 months, energy stocks are still down roughly 22% from the highs last year. Financials stocks (i.e., banks), consumer discretionary and healthcare stocks are also off more than 15% from their recent highs. We simply point this out to suggest that their appears to be room for at least certain areas of the stock market to continue to run.
Presidential Election Impact
We will be able to expand upon our commentary during the next Quarterly Newsletter as we will know more about how the election cycle is playing out. We will know the Vice President candidates. We will have had an opportunity to see how Donald Trump, the presumptive Republican candidate, and Hillary Clinton, the presumptive Democrat candidate, develop their strategies and attack each other.
What we can say with a high degree of confidence is that it will be high drama and extremely entertaining. We can also say that in our opinion, neither candidate is likely to be some savior-type figure that is going to instantly turn our country and economy into a robust engine of growth. Furthermore, we would anticipate that whomever wins in November will likely face some difficult financial times during their first term in office.
As you all are aware, we have executed a broker-dealer change away from ProEquites to our previous broker-dealer, First Heartland Capital. This was not an easy process and we continue to have plenty of work to be done. We are very happy to be back with First Heartland Capital. There processes are very user friendly, practical and efficient.
As we have stated throughtout this process that the broker-dealer does not interact with clients frequently. However, our office interacts with our broker-dealer typically multiple times each day. Therefore, when we have a healthy, efficient and effective relationship with our broker-dealer, we are able to offer a higher degree of service and attention to our clients. Which is of our paramount importance and that is what each and every one of our clients deserves!
We would like to say thank you to all of our clients for maintaining their patience and confidence in us while we execute this transaction!
We wish you all a happy and fun Summer!
“The Kiplinger Letter”. Volume 93, Number 26. July 1, 2016. Washington, DC.
“Bob Brinker’s Marketimer”. Volume 31, Number 4. April 4, 2016. Littleton, CO.
“S&P 500 Index Stock Prices Relative to Their 52-Week Highs”. First Trust. July 6, 2016.