Key themes in the first half of 2016

The surprise result of the U.K.’s “Brexit” vote to leave the European Union shocked financial markets and left Europe stocks down -3.8% for the quarter. Global equities initially reacted with sharp declines, but recovered into quarter-end to finish up slightly. The S&P 500 is up +3.84% over the first half of the year.

Defense led
Defensive sectors continued to be rewarded this quarter as Telecom (+7.06%) and Utilities (+6.79%) led the way, further boosting their year-to-date superiority with total returns of +24.85% and +23.41%, respectively. At the other end of the spectrum, generally weak revenue growth and declining corporate earnings negatively impacted the Technology (-2.84%) and Consumer Discretionary (-0.91%) sectors during the quarter. Financial companies are still the worst performing category in 2016, down -3.05%.

Bonds beat stocks
Bond yields continued to fall in the U.S. and in many developed markets around the world in the face of lackluster economic growth. The decline in rates added to the impressive bond market returns this year, up +5.3%, maintaining their lead over equities. [Note, when interest rates fall, bond prices rise.]

The Fed on hold
Geopolitical uncertainty and questionable economic health led the Fed to remain patient in June. After the Brexit vote, most forecasts now show diminished chances for additional rate hikes in 2016.

Where do we go from here?

Over the last 18 months U.S. equities (S&P 500 index) returned just 2.2%, while a challenging global growth environment, punctuated by frequent shocks, has left most foreign markets in negative territory. With the European Union and Japan still in the midst of programs of monetary stimulus, persistently weak fundamentals and low interest rates are creating a worrisome environment for overseas investors.

In the U.S., corporate profits have contracted for five consecutive quarters triggering the Fed to lower their growth expectations and indicate the postponement of future rate hikes. This shift in posture seems to have lent support to domestic markets recently as they attempt to climb the proverbial “wall of worry.” Despite a slower growth environment, recessionary conditions do not look to be imminent, which is why we believe U.S. companies appear to be a relatively attractive investment option compared to struggling international markets.

As we work though earnings season a common theme of U.S. companies beating lowered earnings expectations has emerged. The market has reacted positively to these results, with the S&P 500 breaking all-time highs. Though the potential for uncertainty and volatility still exists, we maintain a cautious optimism for U.S. markets as long as conditions continue to progress.