Second Quarter 2016 Market Review
In all our years of working in and studying the stock market, we cannot recall when so many investors got it wrong. “Power to the People!” was a widely heard slogan in the U.S. during the 1960s. The U.K. citizens seemed to reflect that sentiment in late June when they voted to exit the European Union. Shortly after the vote it was found that many of the voters didn’t understand what they were voting for and that the advocates supporting the exit didn’t have even a rough outline of a plan as to how to accomplish an exit. Talk about creating a negative investment environment. The stock market, after moving in a modest uptrend for most of the second quarter, moved sharply lower in response to the results of the U.K. vote which was almost completely unexpected.
Fortunately, the U.K. accounts for only 3.9% of U.S. exports and the economic numbers for the U.S. were above expectations in the weeks following the market decline. In the end, the S&P 500 increased 2.46% for the second quarter and 3.84% during the first half of the year. For the second quarter, last year’s beaten down Energy sector posted the strongest gains at +11.62% while the Information Technology sector came in last place with a decline of 2.84% for the quarter and near the bottom with a decline of 0.32% for the first half. In the fixed income arena, interest rates in general declined to record or near record lows influenced by concerns over global economic conditions, especially in Japan, and in parts of Europe where a number of government rates are below zero. The U.S. 10-year Government Bond rate recently hit a record closing low of 1.395% while the Intermediate Government/Corporate Bond Index increased 1.59% for the quarter and 4.07% for the six months.
While the economies of most free world countries are not running on all eight cylinders, we are encouraged by the progress we see in the U.S. at the present time. Consumer spending has picked up, jobs are being created at a reasonable rate, wages appear to be firming, the Energy sector looks to be stabilizing, and monetary policy (i.e. low interest rates) continues to have a positive influence.
Importantly, all these factors are contributing to a better earnings picture. Compared to a somewhat dismal earnings trend of 12 months prior, analysts have been raising their earnings estimates for the
past 11 of 12 weeks. While valuations are not overly compelling, they are lower than they were at the beginning of the year, clearly lower than the peaks recorded in 2015 and they should be supported by the positive direction of the economic and corporate profit trends that we expect. Barring some obvious unforeseen political or terrorist event, the investment environment should be favorable for most of the time over the next 6 months.