Second Quarter 2016 Highlights
• Bond yields continued to drop, especially with the “flight to safety” from Europe and the Fed’s decision not to raise rates.
• Oil prices and the dollar have stabilized creating a rebound in commodities and emerging markets.
• U.S. stocks continue to advance albeit with the lowest level of bullish sentiment in more than ten years.
The markets continue to recover from their first quarter lows, especially with the volatility accompanying the United Kingdom’s decision to leave the European Union, which was the most recent speed bump in a sideways market now over 18 months in duration. The U.K.’s disentanglement from the European Union will be a long and uncertain process, but the impact on the U.S. economy should be small. Recent data suggests a pickup in the U.S. economic growth in the second quarter, led by a rebound in consumer spending. The contraction in energy exploration (rig counts drop) should be near an end and no longer a drag on overall growth.
A major stumbling block for U.S. equities is the continued negative corporate earnings growth, while low interest rates and inflation continue to be supportive of higher-than-normal valuation levels. Without increased earnings, stock prices are most likely to stay within the narrow trading range they have been in over the last year and a half.
Until recently, global diversification has not added value to overall portfolio returns as the markets of Europe, Japan, and emerging markets have been wrestling with the same issues the U.S. did in 2008. However, with the recent stabilization of the dollar and the drop in energy prices, emerging markets and, in particular, commodities have had a resurgence. Thus, we are selectively adding to the portfolio investments in these areas.
Overall we remain cautious, with a slight emphasis on bonds and are positioned within the portfolios for future volatility, especially with the presidential election in November 2016.