Second Quarter Market Commentary
The final weeks of the second quarter were full of intrigue and volatility as the United Kingdom surprisingly voted to leave the European Union on June 23 and world financial markets reacted with a major sell off. The British Pound took the biggest hit dropping to its lowest value in 31 years relative to the US Dollar. The S&P 500 dropped over 5% in two days while the MSCI EAFE index, which tracks developed country stock markets around the world, dropped over 11%. Then a funny thing happened - the initial shock wore off and investors came to their senses and realized this was not the end of the world. Markets all over the world rebounded and finished the quarter much stronger than most probably anticipated.
The end result of all this craziness was relatively strong performance numbers across most equity asset classes. Large cap U.S. stocks finished the quarter up about 2.5% while small cap U.S. stocks were up almost 4%. Real estate investments were up over 7% and commodities were up close to 13%. Even emerging market stocks finished the quarter up just under 1%. The lone negative performance number in stocks was the MSCI EAFE index, which finished down just over 1% for the quarter. The Federal Reserve again decided against raising rates this quarter and combined with a flight to safety after the Brexit news, this drove the U.S. Government bond ten-year treasury yield from about 1.8% at the end of March to less than 1.5% at the end of June. As a result, most bond indices finished the quarter with positive returns in the 1-4% range.
The Fed's decision to leave rates unchanged was an interesting one and was not well received by most of the economists who we follow. David Kelly, chief economist at JP Morgan, compared it to a photographer trying to take a picture of a kindergarten class. The photographer might want to wait until every kid is looking at the camera and smiling so he can get the perfect picture, but as anyone who has dealt with kindergartners knows, that's a nearly impossible task. The Federal Reserve appears to be waiting for everything to be perfect - strong economic growth, 2% inflation, strengthening labor growth, peace and tranquility around the world, etc. But just like the kindergartners, it's unlikely we will see these perfect conditions anytime soon. What we do have are very good economic conditions with improving numbers across the board. It should be noted the U.S. isn't alone in their decision to keep rates low right now. Over 70% of government bonds from countries around the world are currently paying less than 1%, with many at negative interest rates!
To take the kindergarten photographer analogy one step further, let's consider your own investment portfolio. There are some scary things going on in the world that might make you want to abandon your investment approach at times. From terrorist attacks here and abroad to Brexit to a pending election featuring two of the most controversial candidates in U.S. history, there's an endless supply of reasons to be fearful. But remember there will always be something to be afraid of in the world. Things will never be perfect, just as you'll never get all those kids to smile at the same time. If things do ever seem perfect and you have no fears about how current events will impact your portfolio that might be when you should worry. (If those kindergartners all start looking at you and smiling at the same time you should worry too, because they’re probably up to something!) In the meantime, remember that you have a financial plan in place that will help you reach your goals in the long-term, even though scary things will happen in the short-term.
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