2nd Quarter Recap

Annex Wealth Management

US Growth Rebounds In Second Quarter

Following a volatile first quarter dominated by investor concerns over global growth, most major asset classes were able to post modest gains in the second quarter as U.S. economic growth rebounded.

The most noteworthy event of the quarter was the unexpected outcome of the British referendum on whether to remain in the European Union. Most political pundits and investors had been pricing in a victory for ‘Remain’ instead of the ‘Leave’ decision. Stocks sold off for two days before recovering most of those losses rather quickly.

Although the Brexit outcome may push the UK economy into recession, its impact on the EU and the global economy at large is likely to be modest. Amid the fallout, uncertainty has clearly risen, dampening the positive impact of quantitative easing, stable energy prices, and foreign exchange weakness.

Patience Leads To Opportunities

 In spite of all the negative headlines regarding international stock markets, we still believe there are opportunities for the patient investor as more attractive valuations and accommodative monetary policies remain supportive.

Fixed income securities posted positive results in the quarter, with investors pushing prices high enough in some foreign markets (e.g., Japan and Europe) to cause their yields to move into negative territory. U.S. Treasury, corporate and high yield bonds performed well as investors were attracted to their above-average yields, stable to improving business prospects, and the safe haven status of the US dollar.

Reasons For Second Half Optimism

Since last August, the US equity markets have been volatile – with two 10% corrections and a 6% Brexit-related sell-off. However, most US stock indices remain near the same levels they were a year ago. Despite the increase in investor uncertainty and market volatility, we have reason to be optimistic about the second half of 2016.

First, we expect interest rates to remain lower for longer. With the yield on the 30 year Treasury now approaching the dividend yield on the S&P 500, we believe US stocks remain attractively priced on a relative basis.

Secondly, with the price of oil more stable and the US dollar in a holding pattern, we expect earnings growth for US stocks to begin a accelerate in the second half as the negative effect of dollar strength on reported profits begins to reverse.

Finally, as uncertainty over the outcome of this year’s Presidential and Congressional elections begins to dissipate we anticipate a broader rally which may include a rotation away from defensive fixed income and bond substitutes toward more economically sensitive equity securities.