A Look Back at the Markets: Third Quarter 2016

After the excitement of the Brexit vote last quarter, markets calmed down in the third quarter, and for the most part, we saw significantly less volatility relative to previous quarters. This isn’t unusual for the late summer months, when even traders take some time off from the markets.

But it wasn’t all smooth sailing — especially in September, when the European Central Bank decided against extending its quantitative easing program, and there was uncertainty about whether the Fed would raise rates. That bout of volatility was quelled by the Fed’s decision not to raise rates in September. Overall, investors’ appetite for risk increased this quarter, and stocks (particularly small-cap stocks and international stocks) outperformed bonds.

In the U.S., small-cap stocks (represented by the Russell 2000 Index) were the star performers, returning 9.1%. This far exceeded the 3.9% return of the S&P 500 Index, which is composed of U.S. large-company stocks. In a reversal from last quarter, value stocks (Russell 1000 Value TR: +3.5%) modestly trailed growth stocks (Russell 1000 Growth TR: +4.6%); however, year-to-date value stocks are still outperforming growth stocks.

third-quarter-2016-market-performance
Developed by the Hewins Financial Advisors Investment Committee

International-developed markets posted strong performance, as investor fears regarding the Brexit impact receded. The MSCI EAFE Index of international-developed market stocks gained 6.4% in US$ terms; most of these gains took place in July. Emerging-markets stocks (MSCI EM GR) returned an impressive +9.2% (in US$ terms). Brazil, Russia and China were among the strongest performers in the emerging markets. Currency fluctuation had a mildly positive impact on the returns for U.S. investors overseas, as the dollar depreciated relative to the euro and many emerging-market currencies.

third-quarter-2016-global-market-performance
Developed by the Hewins Financial Advisors Investment Committee

On the fixed-income side, the Federal Reserve decided in a split vote against raising rates in September (note that the last time the Fed had three dissenting votes was in December 2014). U.S. Treasury yields inched up over the course of the third quarter with shorter-term Treasury yields rising slightly more than longer-term yields. Despite the meager bump up in Treasury yields, bond yields in both the U.S. and international-developed markets still remain very low.

The Barclays Aggregate Index of domestic investment-grade bonds (the U.S. bond market) eked out a 0.5% return this quarter. Municipal bonds were down slightly with the Barclays Capital 1-10 Year Municipal Bond Index declining 0.1% this quarter. Meanwhile, high-yield bonds (BofAML US HY C Pay BB-B Constd Index) gained 5.0%, and emerging-markets bonds (JPM GBI-EM Global Divers TR USD Unhedged) were up 2.7%. Both of these segments have logged double-digit returns year-to-date, as investors continue to search for yield in the low interest-rate environment.

Achieving long-term returns requires discipline and patience. Over the past few years, that meant sticking to international stocks, emerging-market stocks and small-cap stocks when the only segment that seemed to be adding to returns was U.S. large-cap growth stocks. This quarter and so far this year, the patience and discipline of sticking to a globally diversified portfolio has started to pay off.

 

*The U.S. stock market is represented by the Russell 3000 Index.

Hewins Financial Advisors, LLC d/b/a Wipfli Hewins Investment Advisors, LLC (“Hewins”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. Hewins is a proud affiliate of Wipfli LLP. Information pertaining to Hewins’ advisory operations, services and fees is set forth in Hewins’ current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at www.adviserinfo.sec.gov. The views expressed by the author are the author’s alone and do not necessarily represent the views of Hewins or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Hewins, and Hewins does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Hewins of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional. Hewins does not provide tax, accounting or legal services.
Rafia Hasan
Rafia Hasan

CFA, CFP® | Director of Investments

Rafia Hasan, CFA, CFP®, is the Director of Investments for Hewins Financial Advisors, based in Chicago, IL. Rafia is a member of Hewins' Investment Committee and has a deep knowledge of the financial markets, specifically in the areas of alternative investments and private equity. She also specializes in personal financial planning and estate planning for women investors.

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A Look Back at the Markets: Third Quarter 2016

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