The second quarter of 2016 ended in spectacular fashion. We think it is fitting to begin our letter discussing what transpired in the markets at the end of June. Things were cruising along just fine until the United Kingdom voted to leave the European Union, the political and economic union it has been a member of for the past 43 years. The UK’s exit is commonly referred to as Brexit. In a matter of hours after the referendum’s fate was known, panic set in and investors started running for cover.
The reaction in the markets, like so many unexpected events, was swift and in some cases severe. Investors, as they too often do, decided to sell first and ask questions later. Several European markets were down 7%-8%, overnight, with some losing more than 10% of their value in ONE day. The markets here in the US were down 5% before it was all said and done. As quickly as these markets fell, many rebounded equally as fast. For those who were caught up in the hysteria, many missed out on the subsequent bounce-back rally. A week after the crisis the S&P 500 was sitting less than a percentage point from where it was just before the vote, and as of Monday, it has clocked a new all-time record high.
This is a prime example of how unforgiving markets can be for those who try to time or predict their future direction. That is why we are adamantly opposed to making any investment decisions based on forecasts and predictions. We know how unreliable they are, and too often, they are based on the emotions of the moment. Patience and discipline are two of the most important traits practiced by successful investors. We are proud to say that ALL of our clients kept a cool head through what was a turbulent few days. This allowed us to look for opportunities to buy in the face of what looked to us like irrational market behavior.
That was just the last week of June. Before all of this Brexit talk, we had an actual quarter. In spite of all of the hoopla surrounding the Brexit vote, the markets still managed to eke out a positive return in the second quarter. Large company stocks, represented by the S&P 500, posted a gain of 1.9% for the quarter, and are now up 2.7% for the first half of 2016. Small company stocks fared a bit better in the quarter, returning 3.8%, pushing their year to date return into positive territory, up 2.6%.
We saw more of the same with international stocks. All the gains for the quarter (and year) were erased in the two days following the Brexit vote. Developed markets outside of the US lost 1% for the quarter, bringing them down nearly 3% on the year. Emerging market stocks, which have struggled for the better part of five years, continue to be one of the lone bright spots in the world in the first half of 2016. They were slightly up for the quarter, returning 0.7%, bringing their year to date return to 6.4%.
Bonds continued to show strength, as interest rates fell yet again. Most importantly, during the first half of the year, bonds have done exactly what they are designed to do in your portfolio: dampen the volatility brought on by the stock market. This is an essential role that bonds play in a diversified portfolio.
As interest rates have continued to decline, real estate has also been one of the beneficiaries. Real estate investments were up 5.4% for the second quarter, with a gain of 10.8% for the year. Gold has also benefited from the increased uncertainty through the first six months of the year. Investors continued to flock to gold in the second quarter. Gold gained 6.7% over the last three months, and was up 25% for the year.
It has been a rollercoaster ride through the first six months of the year. There’s no telling if the current level of volatility will continue through the summer months and into the fall. Don’t be surprised if the news is filled with doom and gloom scenarios. You’ll continue to see dire headlines, if not about Brexit or the Middle East, then about China’s debt situation and the Fed either deciding or not deciding to raise rates in the US economy. Oil prices are going to continue bouncing around unpredictably. The remarkable thing to notice is that with all the wild headlines we’ve experienced so far, plus the worst start to the year in US market history, the markets are up slightly here in the US, and the economy is still growing. Yes, your international investments are down right now, but eventually, you can expect them to come to the rescue when the American bull market finally turns.
The concerns out there are real and could continue to hinder growth and put pressure on the stock market. The good news, however, is that there are some major positives that might not get the same news coverage, but could give a boost to stocks in the second half of the year. The strength of the dollar and falling oil prices have hurt corporate earnings. Those headwinds are starting to abate. It doesn’t appear as though the Brexit is going to hurt US companies all that much. Corporate earnings in the US, which may come in weak in the second quarter, are expected to rebound in the second half. Lastly, another potential boost to stocks, in our opinion, is that investor sentiment—investors’ confidence in the market—recently showed the lowest level in more than 10 years. Counterintuitively, this is an extremely positive indicator for stocks. In the face of low investor sentiment, the stock market generally has generally had exceptionally strong returns a year later.
It is sure to be an interesting second half of the year, with two political conventions, a presidential election involving two of the most disliked candidates in history, a new Prime Minister in England, and the continued fallout from Brexit, just to name a few. We will continue to focus on the big picture, and even these headline grabbing events are unlikely to have much of an effect on long term returns.
As always, please give us a call or come in to see us if you have any questions or concerns. We love speaking with you and being of service. Enjoy your summer! It’ll be gone before you know it!
Calling all neighbors in the Alamo, CA area and beyond! You work hard for your money, and now we want to help make it work for you. At Del Monte Group, we offer out-of-the-box wealth management planning that is clear and actionable at every step. If this sounds like the type of financial support you need, schedule an appointment to meet with Richard or Angela today. Visit APlaceOfPossibility.com/Calendar to get your meeting on the books. Need more help or have another question? Feel free to contact our team by calling 925.736.6410 or sending an email to Info@APlaceOfPossibility.com.