Market Commentary: Market Recap

Market Update for the Quarter Ending June 30, 2016

Markets down but not out
Despite a dramatic pullback on the unexpected vote by Britain to exit the European Union, U.S. markets rallied at month-end. The S&P 500 Index ended June up 0.26 percent. The Dow Jones Industrial Average performed slightly better, gaining 0.95 percent, while the Nasdaq underperformed, losing 2.06 percent for the month.

For the quarter, results were similar. The S&P 500 led the way with a gain of 2.46 percent, the Dow was up 2.07 percent, and the Nasdaq lost 0.23 percent. All three indices were positive for the period until the sharp drop following the surprising Brexit vote in late June.

A decline in expected corporate earnings also weighed on market performance. Per FactSet, the estimated earnings drop for the second quarter is 5.2 percent, down from a March 31 estimate for a 2.8-percent decline. Moreover, expectations for a further decline are widespread.

Technical factors also weakened in June. All three indices dipped below their 200-day moving averages, though only the Nasdaq ended the quarter below this level.

Developed international markets fared worse than U.S. markets for the month and quarter. The MSCI EAFE Index of developed markets around the world was down 3.36 percent in June and 1.46 percent for the quarter. Technical factors were also weak, as the index fell below its 200-day moving average at June’s end.

The MSCI Emerging Markets Index performed significantly better than the EAFE, gaining 4.10 percent in June and a smaller 0.80 percent for the quarter. Technical factors remained positive.

The broad fixed income markets had a strong month and quarter. The Barclays Capital Aggregate Bond Index rose 1.80 percent in June and 2.21 percent for the quarter. The Barclays Capital U.S. Corporate High Yield Index also performed well, up 0.92 percent and 5.52 percent for the month and quarter, respectively.

U.S. economic news continues to support growth
Domestic economic news for the quarter was mostly positive, with strength in housing and consumer data offsetting a worrying drop in job creation. Also positive was the upward revision of first-quarter gross domestic product (GDP) growth to 1.1 percent.

Despite a disappointing May jobs report, consumer confidence increased to the highest level since last October (see Figure 1) and personal spending continued to increase, up 0.2 percent in May with an upward revision for April to a gain of 0.5 percent.

Figure 1. Conference Board Consumer Confidence, 2006–2016

Housing also supported the economy during the quarter. Existing home sales increased from 5.33 million to 5.53 million in May, higher than initial estimates. Additionally, the 2.4-percent year-over-year increase in pending home sales in May indicates continued growth in the sector.

International risks continue to drive global markets
Negative headlines around the world moved markets during the quarter, with the Brexit vote in particular roiling equity markets at the end of June. Although the referendum result increased uncertainty, its long-term impact on the U.S. economy will likely be minimal.

Looking toward Asia, China’s growth has continued to disappoint. To counter the slowdown, China has been devaluing the yuan, leading to that currency’s lowest level against the U.S. dollar since December 2010.

More U.S. growth and international risk
We end the quarter in a similar position to where we started. U.S. growth continues, with some concerns and risks. International political and economic risks still ebb and flow.

At the same time, we have made progress. Consumer confidence and spending are on the upswing, we survived the Brexit vote without serious damage, and economic headwinds continue to abate. The U.S. economy leads the developed world, and U.S. markets are still attractive to global investors. Though international markets look risky, as we have just seen, even real risks won’t necessarily derail the recovery. As always, we continue to recommend a well-diversified portfolio; it is the best path for arriving at a long-term financial destination despite short-term uncertainty.

All information according to Bloomberg, unless stated otherwise.

Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Barclays Capital U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.

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