Transcript Market Environment - Marco Consulting Group

MCG Journal
Q2 2016
Quarterly Summary: Brexit Shocks the Markets
Stock market performance in the second quarter of 2016
was dominated by something that occurred just a few days
before quarter-end: the Brexit referendum. World markets
were shocked by the outcome of the June 24 referendum,
which ended with UK citizens voting in favor of exiting the
European Union. Most market watchers and polls had not
anticipated this outcome, and markets tend to hate
political surprises like this one. In the days immediately
following the Brexit vote, stocks plunged worldwide.
In the US, stocks were able to eke out gains
for the quarter despite the Brexit turmoil. The US market’s
continued strength was due, in part, to a still relatively
robust economic backdrop. Despite what many economists
perceived to be a disappointing 1.2% GDP growth in the
first quarter, consumer spending remained strong, and
retail sales in particular continued to show growth. Home
prices grew as well in the first quarter as buyers competed
for fewer house listings. Unemployment stood at 4.9% as
of June 30, a bit higher than the 4.7% seen earlier in the
year but still below policymakers’ target of 5%. So, despite
global economic turmoil, many of the US economy’s
indicators were positive.
With relatively solid US economic news,
particularly on the employment front, it had once seemed
that the Federal Reserve would raise interest rates in the
near future. However, the global shock following the Brexit
vote was a major reason why the Fed held off once again
from hiking. The Fed has recently made decisions with one
eye on global political and macroeconomic events, as they
do not want to rattle already nervous markets further.
However, it is worth noting that many stock markets, even
in Europe, rebounded quickly after the Brexit shock which
may give the Fed the confidence to raise rates once again
by the end of 2016.
While US stocks made small gains overall in
the quarter, Treasury bonds also continued to climb.
Historically, when investors have favored stocks, bonds
have most often declined. However, as central banks in
several developed countries have continued buying up
government bonds as a way to stimulate their countries’
economic growth, interest rates on much of the world’s
sovereign debt has began yielding negative interest rates.
In fact, $11.7 trillion in government bonds worldwide had
negative yields as of June 30, up from $1.3 trillion at the
end of May. Global demand for US Treasuries, which do not
have negative yields, soared in the second quarter as
investors searched for any yield at all. This in part led to
record low yields on the 10-year US Treasury bond during
the quarter. Investors’ ‘reach for yield’ has led to strong
returns from high-yield debt, emerging market debt and
dividend-paying stocks.
Commodities continued their surge in the
second quarter, though oil prices were not the only driver.
Gold has soared more than 30% for the year through June
30. Investors typically buy gold when they are nervous
about markets. With uncertainty growing about low and
stagnating worldwide growth, as geopolitical worries
mount, and as politics in Europe and the US continue to be
volatile, it is easy to see why investors are nervous. and
buying safe haven assets such as gold.
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MCG Events and News
Upcoming Events
Michael Joyce, MCG Executive Vice President and Senior Consultant, will cochair the Institutional Investors Roundtable for Consultants & Institutional
Investors in Chicago on October 19-21.
Joyce will also speak on the Pros and Cons of Hedge Funds at the 62nd
Annual International Foundation of Employee Benefits Conference on
November 13-16 in Orlando, FL.
Michael Joyce
Recent Events
MCG Vice President/Senior Consultant Julian Regan spoke on a Consultant Panel
at the Society of Professional Asset-Managers and Recordkeepers (SPARK)
conference June 20 – 21. The panel reviewed potential impacts of the DOL
fiduciary rule and other developments impacting defined contribution
participants, plan sponsors and service providers.
Regan spoke on a Consultant Panel on July 20 at the Public Funds Summit East in
Newport, RI. The panel discussed industry issues, including delegated consulting
vs. traditional consulting models, the role of the consultant in ensuring that
recommendations are independent and other industry issues.
Regan was quoted in an article on public pension fund fee savings initiatives in
FundFire on May 20.
Julian Regan
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US Economics
US GDP growth of 1.2% in Q2 was not all that strong, but other indicators
seemed to show that the economy is still relatively solid.
Unemployment rose a bit in the second quarter, but remained below
policymakers’ 5% target.
While inflation has picked up a bit in the last 12 months amid wage gains, it
still trails the Federal Reserve’s 2% target.
The labor force participation rate dropped in the second quarter as fewer of
those looking for work were able to find it.
Source: Factset
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US Economics
Consumer confidence rose in the second quarter as retail spending
continued to be solid (see below).
U.S. home prices rose 5.7 percent in the first quarter from a year earlier as
buyers competed for a limited supply of listings.
Retail sales increased as unemployment remained low and wage gains
were seen.
For the second quarter, industrial production fell at a rate of 1.0 percent, its
third consecutive quarterly decline.
Source: Factset
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International Economy
Eurozone GDP growth fell in the second quarter as Brexit-related
uncertainty hit the region.
Unemployment remained relatively flat with big dispersion in rates
between Germany and more economically troubled countries like
Greece.
Japan’s GDP growth rate grew by 1.17% in Q1 2016 as Japan shook off
effect of strong yen and China’s slowdown.
Japan unemployment declined to 3.1% in June, though the labor supply is
still hampered by an aging population.
Source: Factset
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US Equity
US stocks remained positive for the quarter as robust economic growth and
low rates remained tailwinds.
Mid caps outperformed in May and June; small caps tumbled in June amid
a post-Brexit flight to quality.
Stocks’ overall P/E ratio remained relatively flat in the quarter, but above
historic norms.
Value beat growth in June as investors favored dividend-rich stocks such as
utilities amid the ‘reach for yield’.
Source: Factset
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International Equity
European stock markets took a tumble after the Brexit
vote, but several markets bounced back soon afterward
(as shown at right after June 27.)
Price to Earnings
45.0
50
45
40
35
28.7
28.1
27.1
26.8
30
22.6
25
18.4
20
14.4
17.9
17.4
16.9
16.0
16.4
15.7
15.3
15 16.7
14.1
14.1
15.2
15.1
13.1
12.0
11.0
12.6
10
11.9
11.7
10.5
10.4
10.3
5
9.6
8.5
8.2
0
S&P 500 S&P 400 S&P600 MSCI EAFE MSCI EM
MSCI
MSCI UK
MSCI
World
Japan
Valuations across several indices in the US and other
developed markets are at or above historic averages.
Japan is one exception, with an average MSCI Japan P/E
that is well-below average.
Source: Factset
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US and Global Fixed Income
The federal funds target rate remained at 0.5% as the Federal Reserve held
off once again on hiking rates before and after the Brexit vote.
The yield on the US 10-year Treasury bond fell to record lows in the second
quarter amid robust global demand for US Treasuries.
Global Treasury yields continued to decline, and Japan and the UK’s 10-year
Treasuries offer negative yields by the end of the quarter.
High yield surged as investors searched for yield as as oil prices climbed.
Most fixed income sectors were positive for the quarter.
Source: Factset
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Fixed Income
• growth.
The US yield curve continues to flatten as short-term
rates have not risen and long-term rates are pushed
down by global demand.
Negative short-term interest rates abound in developed
markets as central banks use monetary easing policies to
stimulate
Source: Factset
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Alternatives
Real estate gained again in Q1 2016 as low rates and a
solid US economy continue to be tailwinds for the sector.
Commodities continued to soar in Q2 2016, though crude
oil fell in June amid questions on global demand. Gold
gained as investors searched out safe havens and yield.
Source: Factset
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