The year began with a new focus, and an unfortunate focus on the country’s water supply. Residents of Flint, Michigan are furious that water from the local Flint River has smelled and tasted horrible. More important however, the high levels of lead caused a state of emergency to be issued on January 5th, 2016. Political wrangling, budget shortfalls, and poor policy decisions have wreaked havoc on Flint residents.
Equity markets also smelled in January. Most major equity markets sank considerably during the month with the S&P 500 down by 5percent. Overseas markets, as represented by the MSCI EAFE Index pulled back by 7.2 percent. Interest rates, on the other hand, dropped on renewed pessimism as The Barclays U.S. Aggregate Bond Index rose by 1.4percent in January.. [I]
The race to the White House began on February 1st as Iowa casted the first votes of the 2016 primary election season. Hillary Clinton takes the Democratic caucus. On the Republican side, Texas Senator Ted Cruz wins while Donald Trump comes in second. In a year of recasts, it is astonishing to remember how it all began.
We continued to see a sell-off in the equity markets, specifically in the international arena. The MSCI EAFE Index was down 1.8 percent and the MSCI Emerging Markets Index ticked off a modest loss of -.2 percent in the month of February. Again, the Barclays U.S. Aggregate Bond Index rallied adding another .7 percent to its year to date return. [ii]
On March 21st, President Barack Obama descended on the island nation of Cuba, becoming the first sitting American President to visit Cuba since Calvin Coolidge in 1928. While President Obama signified a thaw in relations and some fanfare, the rock band The Rolling Stones garnered an even larger audience playing a free concert to over 100,000 people. While communism may be waning, Mick Jagger and company showed no signs of slowing down.
The thaw in the equity markets also had broken. The equity markets rallied considerably during the month led by the MSCI Emerging Markets Index, up 13.3 percent in March. Even the recent laggard MSCI EAFE Index (representing the developed international markets) rallied 6.6 percent during the month offering relief from the selling pressure of January and February. [iii]
April began with the release of the “Panama Papers”, referring to millions of documents of a Panama- based law firm showcasing how some of the world’s richest individuals shelter monies across the globe. The Prime Minister of Iceland, Sigmundur Gunnlaugsson resigned only days after the leaks showed that he and his wife owned an offshore company. Russian President Vladimir Putin was also entangled in the scandal, though he quickly dismissed the allegations as an attempt to destabilize Russia.
Despite the massive build up in inventory, investors continued to dismiss the oil glut, which gave way to a strong rally in crude oil. By the end of April, WTI crude oil closed at $45.92 a barrel, posting a nearly 20 percent rise and adding to the rally off the lows of approximately $26 per barrel reached in early February 2016.[iv]
On May 26th, 2016, the US Republican presidential candidate Donald Trump had reached the number of delegates needed to secure the party’s presidential nomination. While Republicans would finalize their nomination in July, it was clear that some in the party were less than thrilled with the outspoken candidate. About two weeks later, the Democratic presidential candidate Hillary Clinton reached the number of delegates to secure the Democratic Party’s presidential nomination. And so began the final leg of the race to the white house.
In market news, through May 31, 2016, the S&P 500 was up 3.6 percent for 2016. Interest rates continued their march lower as the Federal Reserve offered a cautious tone. The Barclays U.S. Aggregate Bond Index ended May up 3.5% for 2016, essentially matching equity market returns.[v] [vi]
On June 23rd, 2016 a referendum was held in the United Kingdom to determine if Britain should leave the European Union or remain. Despite the predictions of pollsters and pundits, Britain cast its vote with 52 percent of voters choosing a pro-exit stance to leave the European Union. Despite the initial shock and the British pound dropping precipitously, markets generally recovered quickly with some divergence among specific sectors.
An astounding 72.2percent of eligible UK voters cast a ballot in the referendum. For context, the highest percentage of eligible voters to cast a ballot in a US presidential election in the last 100 years is 62.8 percent in 1960.
As the first half of the year came to a close, equity markets performed well. The MSCI Emerging Markets Index led the way with a 6.6 percent return, followed closely behind by the Russell 2500 at 4 percent. The S&P 500 returned 3.8 percent. The Barclays U.S. Aggregate Bond index raced ahead with 5.3 percent as interest rates pushed lower on global concerns and accomodative Federal Reserve policy.
The first half of 2016 offered similar returns in equities and bonds. The exception were developed international markets, as represented by the MSCI EAFE Index which fell by 4 percent. Equities and bonds seemingly moved in predictable lockstep at this point, despite the world recasting itself at the polls. [vii][viii]
Stay tuned for a review of the second half of 2016, The Year of the Recast, in my next blog post.
Investment in the portfolios mentioned in this document may not be suitable for all investors. Past performance is not a guide for future performance and should not be the sole factor in consideration when selecting investments. The price of investments may go up or down and the investor may not get back the amount invested. Your income is not fixed and may fluctuate. The value of investments involving exposure to foreign currencies can be affected by exchange rate movements. Levels, bases and reliefs from taxation can change.
Past performance is no guarantee of future returns.
A word about risk: Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investing in the bond market is subject to certain risks including market, interest rate, issuer credit and inflation risk; investments may be worth more or less than the original cost when redeemed. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuation, economic and political risk, which may be enhanced in emerging markets.