Equity markets quickly shrugged off the Brexit referendum that occurred late in the second quarter. After plunging several percentage points following the announcement that the U.K would be exiting the European Union, stock prices reversed course at the beginning of July. They resumed their upward trajectory and the S&P 500 actually reached new highs during the quarter. The S&P was up 3.9% during this period.
More than recent prior quarters, the ten primary economic sectors exhibited substantial dispersion in performance, making sector allocation and security selection extremely important. The performance disparity between the best and worst performing sectors during the quarter was a total of 16%. Information technology, financials and industrials were the strongest performers, delivering gains of 12.9%, 4.6% and 4.1% respectively. Telecommunication services, utilities and consumer staples were the weakest with returns of -5.6%, -5.9% and -2.6% respectively. The S&P Healthcare sector was up 0.5% for this period.
Outlook for 4th quarter 2016:
Domestically, the economic environment, although still below optimal levels, is beginning to show signs of acceleration. In the U.S. so far, Brexit, Britain’s decision to leave the EU has had little economic impact. Conditions remain favorable, with, among other things, continued low interest rates; an improving employment picture; surging vehicle sales; and a steadily recovering housing market.
The government released the third estimate of the second quarter GDP. This turned out to be a somewhat disappointing 1.4%. However, economists are generally of the belief that the economy is on the right track, and will accelerate from these levels. Consumer spending was the primary driver of growth, as business investment declined. The environment is favorable to continued support from the consumer, with low interest rates, only modest inflation, low and stable energy prices and a recovering housing market.
Households have taken advantage of years of low interest rates to lock in low mortgage payments and still maintain an adequate level of savings. Many believe that employers will continue to add about 180-220 thousand jobs per month into 2017 and the unemployment rate will trend back down to 4.7%.
It is likely that the Federal Reserve will raise interest rates near the end of the year, but the prospect of a hike has been clearly signaled and seems to have been digested by the markets. The impact of the presidential election is a wildcard, but markets are an excellent discounting mechanism, meaning any dislocation occurring as a result of the outcome may be short-lived, much like Brexit’s impact. There are certainly other ongoing risks, such as the threat of terrorist activity and unforeseen setbacks in either the domestic or global recoveries. The consensus is, however, that an end to the economic recovery is not yet on the horizon.
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