July 2016 Financial Markets Summary
The U.K.’s stunning decision to leave the eurozone came down to several key factors: bureaucratic overreach from Brussels, the flood of refugee immigration, sluggish economic growth, and massive net subsidies to bail out the EU’s perennial weak links that refuse to get their fiscal houses in order. Angry voters opted for change, and they were less concerned about the potential impact of an exit on the value of the British pound and their trade relationships with other European countries. The good news is that in most other EU countries and in the U.S., only governments can propose national referenda. A concern is that electorates are angry enough to pursue economic agendas that are not in their own interests. As Winston Churchill once observed, “The trouble with committing political suicide is that you live to regret it.”
After slumping 5.7% peak-to-trough in two days, the S&P 500 recovered almost all of those losses through July 1, as if Brexit never happened. That probably is not a ridiculous assumption, says JP Morgan. “The referendum was a political crisis, not a financial or banking one, and political crises tend to be self-correcting.” Besides, in the scheme of things, a U.K. recession many now foresee may not be that big of a deal. Fundstrat says a 2% U.K. recession would carve $56 billion from global GDP. By comparison, when crude oil prices plunged 62% below their 2-year average, there was a $1.6 trillion drag on global GDP.
The U.S. labor market has stalled over the past three months, core PCE inflation has ticked down over the past two months, and economic growth and corporate results have decelerated sharply over the past several quarters. All the global volatility is pushing investors ever more into government bonds, and today the best deal in the world among government bonds remains our own 10-year U.S. Treasury, trading at a yield of a measly 1.46%, compared to negative yields on its competitors, the German and Japanese bonds. This means more foreign money in our bond market, pressuring yields here lower in the near term.
At the halfway point in the year, with the exception of developed international stocks, most investment classes would look very good to duplicate what they have done year to-date. As we noted last month, change is constant, and it seems to be increasing in speed. Be sure your portfolio’s overall allocation matches your long-term goals, your shorter-term cash flow needs, and gives you some measure of assurance. And remember that Today’s headlines and tomorrow’s reality are seldom the same.
|Asset Index Category||Category||Category||Category||10-Year|
|3 Months||2016 YTD||2015||Average|
|Dow Jones Industrials – Large Cos||1.4%||2.9%||-2.2%||4.9%|
|S&P 500 Index – Large Companies||1.9%||2.7%||-0.7%||5.1%|
|S&P 400 Index – Mid-Size Companies||3.5%||7.0%||-3.7%||6.9%|
|Russell 2000 Index – Small Companies||3.4%||1.4%||-5.7%||4.7%|
|MSCI EAFE Index – Developed Intl.||-1.5%||-6.3%||-3.3%||1.5%|
|MSCI EM Index – Emerging Markets||0.7%||6.4%||-16.4%||3.5%|
|Short-Term Corporate Bonds||1.0%||2.0%||0.2%||2.9%|
|Global Government Bonds||2.8%||6.8%||-3.9%||4.7%|
|Bloomberg Commodity Index||12.8%||13.2%||-24.6%||-5.9%|
|Dow Jones U.S. Real Estate||6.8%||12.3%||2.1%||6.1%|
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