Despite the unexpected Brexit vote in June, which caused a lot of volatility, the S&P 500 was up 2.5% for the second quarter. The gains were driven by the continued recovery in the oil market, which drove crude prices more than 25% higher and pushed the energy sector to the top of the S&P sector rankings.
Bonds also had a strong quarter, as we saw global yields (or rates) continue to decline. As a reminder - bond prices and yields have an inverse relationship - so when yields come down, prices go up.
As of the end of the second quarter, the energy sector was the highest returning sector of the S&P500, up 11.6% YTD and High-yield bonds were the highest returning sector of the bond market, up 5.5% YTD.
We wanted to share an interesting point that one of our favorite portfolio managers, Bob Doll of Nuveen Asset Management, mentioned in his latest market commentary. He pointed out that following the Brexit vote, U.S. Treasury yields plummeted to all-time lows, and that normally low yields are a sign that the economy is weakening. But the underlying economic fundamentals do not appear to match what yields are telling us. In fact, the Federal Reserve Bank of New York's Recession Model is forecasting only an 8% chance of recession in the next year. Bob argues that the reason yields are so low is what he calls “global forces”, which although the he didn't say this explicitly, we believe this means things like negative yields on bonds in countries outside of the U.S., which make our bonds more attractive and is keeping demand for them high (keeping yields low – back to the inverse relationship point).
It’s certainly an interesting time in the global markets!
Regardless of which candidate takes office, many economists believe the U.S. is overdue for a recession. So the question is not whether the U.S. will undergo a recession, but when.
What do you think is in store for the election and the U.S. economy?
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The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.
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The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada.
The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 46 country indexes comprising 23 developed and 23 emerging market country indexes.
The Barclays Capital Aggregate Bond Index, which used to be called the "Lehman Aggregate Bond Index," is a broad base index, maintained by Barclays Capital, which took over the index business of the now defunct Lehman Brothers, and is often used to represent investment grade bonds being traded in United States.
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