With the close of the third quarter 2016, stock markets around the world failed to find firm direction in one way or another. The quarter began with equities in full bull market mode, owing to a rebound from post-Brexit declines that notably occurred because so few investors actually expected the Brexit vote to pass. In July and August generally modest gains continued due primarily to generally positive earnings. In September, however, the appetite for risk loosened amid volatility from steeper valuations, weaker economic data, the potential Fed rate rise, and the uncertainty of the presidential race that has been the very definition of the unexpected. That said, while U.S. equities dropped somewhat they still remained positive for the quarter, however international equities outperformed U.S. equities for the first time since early 2015, thus for the first time in a long time markets other than the U.S. participated in our portfolios. In addition, despite the equity market fluctuations bond yields remained low across the globe, a reflection of an accommodative monetary policy by central banks.
In much the same way people are uneasy with change, the markets are uncomfortable during times of uncertainty. The extreme nature of elections and/or referendums is a source of discomfort at home and abroad. In addition, it appears the Federal Reserve is prepared to raise interest rates for the first time in December of this year. To us that translates into a transition period where we think the market is moving from an interest rate bull market to an earnings-driven bull market. While this has been a historically long recovery of over seven years we think this next phase will allow for this bull market to continue for some time.