After a tumultuous first quarter, the second quarter of 2016 was off to a pretty good start. Markets were marching along nicely (with a few spurts of volatility) until June 23, 2016: the day the U.K. voted to leave the European Union (more commonly referred to as “Brexit”). Equity markets initially reacted both strongly and negatively to the news, which cast a great deal of uncertainty on the future. However, as markets digested and adjusted to this new reality, both U.S. and emerging-markets stocks rallied, bringing the results for the quarter back into positive territory.
The S&P 500 Index, which is composed of U.S. large-company stocks, rose 2.5% in the second quarter. Value stocks (Russell 1000 Value TR: +4.6%) outperformed growth stocks (Russell 1000 Growth TR: +0.6%), and small-cap stocks (Russell 2000 TR: +3.8%) outperformed large-cap stocks.
The dollar appreciated this quarter relative to most developed- and emerging-market currencies, which created headwinds for U.S. investors overseas. Emerging-markets stocks (MSCI EM GR) eked out a +0.8% return (in US$ terms). Even prior to the Brexit vote, international-developed markets were plagued by growth concerns, and the Brexit vote exacerbated those concerns for the Eurozone region. International-developed markets stocks (MSCI EAFE NR) finished the quarter down by 1.5% in US$ terms.
On the fixed-income side, the Federal Reserve held off on raising rates again this quarter, citing weak U.S. employment numbers and concerns regarding the Brexit vote. U.S. Treasury yields declined across the board over the course of the quarter, with longer-term Treasuries performing best. Although Treasury yields in the U.S. are at record lows, they are still higher than the negative government bond yields in parts of Europe and Japan. Investment-grade corporate bonds fared well, despite the uncertainty, and the Barclays Aggregate Index of domestic investment-grade bonds (the U.S. bond market) was up by more than 2% for the quarter.
In international fixed-income, emerging-markets bonds (JPM GBI-EM Global Divers TR USD Unhedged) continued to gain this quarter, rising +3.0%. Similar to emerging equities, dollar strength created headwinds; however, these bonds are up over 14% year-to-date.
Buoyed by the continued rally in oil and commodity prices, high-yield bonds (BofAML US HY C Pay BB-B Constd Index: +4.6%) were one of the best-performing asset classes this quarter and year-to-date.
While the initial shock of the Brexit vote has receded, the U.K.’s departure from the European Union has far-reaching political and economic implications that are nearly impossible to predict. There may be continued volatility in the markets, as this and other events (such as our upcoming election) unfold. In the face of uncertainty, we rely on academic research into past market behavior to guide our investment approach. The evidence shows that maintaining discipline and being diversified are the keys to achieving long-term growth in a portfolio. This quarter’s results are a testament to those principles.
The U.S. stock market is represented by the Russell 3000 Index. Int-Term Municipal Bonds are represented by the Barclays Muni Bond Index 1-10 Yr Blend (1-12).