Third Quarter Investment Outlook: Market Recap
Pessimism Aside - Our Markets Have Proven Resilient
By: Nick Perini, CFA
Friday, October 14, 2016
The third quarter was a rather boring one. The equity markets started the year with a real correction, pulling back more than 10% in the first quarter. Then, in the second quarter, the market had a hiccup on the Brexit vote, but bounced right back into quarter end. Now, here we are, looking back at the third quarter—the most boring of the three.
Through three quarters of 2016, the S&P 500 is up 7.84%, the Dow Jones Industrial Average is up 7.14%, and the Nasdaq Composite is up 6.08%. Interestingly, the technology-heavy Nasdaq was down through the first two quarters of the year, but it had the best third quarter of all the major averages, bringing it back into the green for the year. The third quarter offered relatively low volatility and good returns. The S&P 500 was up 3.85%, and the Dow was up 2.76%. The leader for the quarter was clearly the Nasdaq, returning 9.69%. This year’s performance of the United States equity markets has far exceeded the returns of other developed countries throughout Europe and the rest of the world. Equity returns on the global level (as measured by the MSCI World Index) were up 3.78% through the end of the third quarter.
While we complain about low yields on bonds in this country, again we are at a more normal level than the rest of the developed world. According to the Financial Times, there is more than $13 trillion of negative-yielding sovereign debt in the world. The world has never seen negative yields on this magnitude of debt. Much of this negative-yielding debt is spread around Europe and Japan. Yields on U.S. 10-Year Treasuries at the end of the third quarter were 1.61%. While low, and lower than the beginning of the year, it’s a better return than negative yields. With yields falling during the year, the returns on the Barclays Intermediate Government/Credit Index have been good, returning 4.2% through the third quarter.
With all of the pessimism and nervousness surrounding investing in this country, our markets have proven resilient. While no major asset class seems incredibly cheap, equities in the United States seem to, in our opinion, offer the best value. There will undoubtedly be periods of volatility as the election comes and goes and our new president begins the process of trying to implement his or her new ideas.
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