Quarter Recap
by Derek Felske, Chief Investment Officer
Annex Wealth Management
Following a volatile conclusion to the second quarter, punctuated by the UK’s decision to leave the European Union, global equity markets quickly regained their footing and posted solid advances in the third quarter. During most of the period, stock market volatility was unusually calm as investors remained confident that growth would remain slow but steady and that monetary policy would remain accommodative. For the quarter, international markets outperformed the S&P 500 and US small caps outperformed US large caps.
Our tactical allocations provided investor exposure to each of those areas of the world markets. In the fixed income markets, the Fed’s decision to hold rates steady was validated by signs of stress in the European banking system and the possibility of further fallout from the Brexit decision. Although Deutsche Bank’s problems are largely self-inflicted, we are closely watching for signs of instability. With signs of an impending recession nonexistent, high yield bonds outperformed core fixed income by a wide margin.
Global Economy
As the global economy continues to muddle along, the markets are currently pricing in a 50% probability of a Fed rate hike in December (after the Presidential election). At this juncture, we believe it makes sense to maintain a balanced portfolio with a pro-growth investment stance. The key for further equity gains remains corporate earnings. Despite five quarters of negative year-over-year earnings comparisons, the US markets remain close to all-time highs.
With business confidence stable, consumer confidence strong and labor trends positive, we expect the US economy to accelerate modestly into 2017 and corporate earnings to follow suit as the negative headwinds from the strong dollar and lower oil prices diminish. Overseas, in spite of the negative headlines, we remain constructive on international equites due to compelling valuations and accommodative monetary policy. In addition, with the hotly contested Presidential contest in the books, investors will once again focus on the fundamentals.
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