Here’s to Boring Summers
3Q 2016
So much for Brexit being a big deal. Despite widespread fear of the UK’s decision to leave the European Union, the 3rd quarter was the best one this year for nearly all categories of stocks. The S&P 500 was +3.9% when you include dividends. Mid-sized and smaller companies fared even better, with mid-caps +4.5% and small caps +9.0%. The upside wasn’t constrained to US companies either. The MSCI EAFE index (representing foreign developed markets) was +6.5%, led by Germany and Japan, while the MSCI Emerging Markets index finished +9.2%, led by China and Brazil.
The bond market did very little outside of high yield bonds during the 3rd quarter. Interest rates began the quarter near all-time lows following a sizable late-2nd quarter drop-off. They moved gradually higher for most of the quarter, which resulted in the Barclays Aggregate Bond Index returning a paltry 0.5% for the quarter – about what you’d expect when stocks have a great showing like they did.
On most metrics, the economy continues to do “ok”. It’s true that GDP growth has slowed a bit, but it’s still decidedly positive; the unemployment rate remains near post-crisis lows; inflation remains low; the housing market remains strong; balance sheets across the board (government, consumer, corporate and financial system) are in much better shape from where they were eight years ago. Still, despite the economy doing well and a pretty strong quarter in the markets, we’ve seen consumer sentiment continue to trend generally lower and cash on the sidelines remain at elevated levels. Why is that, when everything seems to be doing relatively well?
One reason could be the changing way Americans consume news. A Pew Research Center report from a couple years ago indicated that the share of Americans who regularly watch a nightly network news program (e.g. ABC, CBS, and NBC) has declined from 60% in 1993 to just 27% in 2012. The shift to more online news consumption has “different people drinking from different fountains”. Over time, political and economic data have to a degree merged when in reality they are not so tightly intertwined. Compounding the issue is that news coverage can become even more charged during election seasons creating even louder, more emotional messages.
With all that said, we acknowledge that there are risks ahead – ISIS and interest rates among the more visible. Probably the most pronounced, however, is the upcoming US presidential election. Markets don’t like uncertainty – and if this election promises anything, it is to be uncertain. But we remind investors that volatility around a big election is common, and that markets often return to normal shortly thereafter. After the election is over, the markets will likely focus again on the elephant in the room – the Federal Reserve. Most analysts expect the next interest rate hike at the December meeting, which may cause market jitters again. But it is important to remember that while changes can be daunting – whether they be changes in leaders, or changes in monetary policy – they usually offer opportunities for disciplined, long-term investors. As always, we will be looking to take advantage of any potential upcoming market volatility to turn tricks into treats.
Image source: PEW RESEARCH CENTER. 2012 News Consumption Survey Q41a, b, k, o, p. Q43a, b, d e. Q61, Q63, Q64. * Search engine use and general news online three or more days a week. All other trends based on those who “regularly” get news from source.