The second quarter of 2016 saw global stocks rise modestly in a volatile quarter. Above average returns in April and May were offset by losses in June due to the British vote on June 23 to leave the European Union. The U.S. economy continued to grow and face low odds of a recession in 2016 largely due to a healthy household sector. Although job gains may be slowing, wage inflation is picking up and labor-market slack continues to fade. The current U.S. expansion is a mix of mid and late-cycle dynamics, that see tighter labor markets but slowing corporate earnings growth. Positive news included an upward revision to first quarter GDP and a drop in the unemployment rate to 4.7%.
U.S. Stocks: Global Uncertainty A Positive For U.S. Markets
The quarter was characterized by a flight to safety as investors shifted into defensive sectors and safe-haven investments. The telecommunication services and utilities sectors rose 7%, while consumer staples gained 5%. More aggressive sectors, such as information technology and consumer discretionary were the only sectors to post declines, losing 4% and 1% respectively. Commodity and commodity producer stocks also rallied as oil and other commodity prices rallied strongly off their first quarter lows.
| U.S. Stock Indices (Ending June) | Last 3 Months | Last 12 Months |
| S&P 500 | 2.5% | 4.0% |
| Russell Midcap | 3.2% | 0.6% |
| Russell 2000(Smallcap) | 3.8% | -6.7% |
Non-U.S. Stocks: Brexit Reversed Early Quarter Gains
Although the UK accounts for just 4% of global GDP and .09% of the world population, the BREXIT vote cast a cloud of political and economic uncertainty over Europe. We would expect volatility to remain high as the issues surrounding BREXIT are resolved over the coming months. International markets were negative overall for the second quarter as the impact of the BREXIT vote caused the MSCI EAFE index to fall 1.5%. Emerging markets continued their strong performance for the year as the MSCI Emerging Market Index gained 0.6% in the quarter and is up 6.4% YTD.
| International Equity Indices (Ending June) | Last 3 Months | Last 12 Months |
| MSCI EAFE (Europe, Australasia, Far East) | -1.5% | -10.2% |
| MSCI Emerging Markets | 0.6% | -12.1% |
Bond Market: Search for Safety and Yield Drove Bonds Higher
In bond markets, the Barclays U.S. Aggregate Index rose 2.2% as the yield on the benchmark 10-year Treasury note fell to 1.49%. Although the Fed had signaled in May that it may raise rates over the summer, weak employment growth and the BREXIT referendum instead drove Treasury yields down. Safety seeking global investors sought refuge in U.S. debt across all sectors providing well above average total returns for U.S. bond investors for the quarter.
| Bond Indices (Ending June) | Last 3 Months | Last 12 Months |
| Barclays Municipal Bond | 2.6% | 7.8% |
| Barclays U.S. Aggregate Bond | 2.2% | 6.0% |
| Barclays U.S. Treasury Bond | 2.1% | 6.2% |
| Barclays U.S. Corporate High-Yield | 4.8% | 1.2% |
We would expect market volatility to remain elevated this year. Competing forces of additional monetary stimulus post-BREXIT will have a positive impact on bond and stock prices, while global political and economic uncertainty will be negative. Underlying the short-term volatility, the U.S. economy continues to grow at stable low single digit rates. This stable growth guides our long-term expectation for financial market returns as we continue to believe that portfolio returns will be positive for diversified investors even with heightened short-term volatility.
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