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The Markets
Second quarter ended with a spectacular finale of Brexit-inspired market volatility.
Investors typically welcome sharp market movements with about the same level of enthusiasm that canines show for fireworks. However, recent market agitations highlighted a key tenet of investing: Volatility often creates opportunity. Following an initial Brexit sell-off, global markets rebounded. Last Friday, Financial Times reported:
"Global equity indices continued their stunning post-Brexit vote recovery, "core" government bond yields hovered near record lows, and sterling stayed in sight of a three-decade trough against the dollar as a tumultuous week in the markets drew to a close. The dollar finished the week on a broadly softer note, helping gold stay in sight of the two-year high it struck five days earlier. Oil prices were volatile but Brent regained the $50 a barrel mark in late trade."
During the first half of 2016, opportunities weren't always where investors might have expected to find them. Barron's reported stocks have become income providers and bonds have been delivering capital gains. "With dividends included, the Standard & Poor's 500 index returned 3.84 percent in the year's first six months, according to Bianco Research. Meanwhile, the Treasury's benchmark 10-year note returned roughly twice that, 7.97 percent..."
Some of the strongest stock market performance was found in emerging markets. On July 1, MarketWatch reported the best and worst (in italics) performing indices for the first half of 2016:
- Argentina (Merval) 25.77 percent
- Russia (RTS Index) 22.95 percent
- Brazil (Bovespa) 18.86 percent
- Pakistan (KSE 100) 15.14 percent
- Canada (S&P/TSX) 8.11 percent
- China (Shenzhen A Shares) -14.49 percent
- China (Shanghai A Shares) -17.22 percent
- China (SSE Composite) -17.22 percent
- Japan (Nikkei 225) -18.17 percent
- Italy (FTSE MIB) -24.37 percent
The three major Chinese indices on the list serve as a reminder that, not too long ago, concerns about the health of the global economy and the world's financial markets focused on China. Today, the stethoscope is pressed to the heart of the European Union.
Predictions of higher interest rates in the United States have become a perennial that never blooms. Coming into 2016, the Federal Reserve was expected to increase the fed funds rate four times, making bonds appear an unwise investment choice. As mentioned, the 10-year Treasury note did just fine. However, the likelihood of the Fed raising rates fell during the quarter. Barron's reported, "Based on Eurodollar futures prices, the U.S. central bank is likely to keep its federal-funds target steady well into next year and perhaps until 2018."
During the last week of June, the Dow Jones Industrial Average and the Standard & Poor's 500 Index each experienced their best performance since November 2015, according to MarketWatch.
Data as of 7/1/16
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1-Week
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Y-T-D
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1-Year
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3-Year
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5-Year
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10-Year
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Standard & Poor's 500 (Domestic Stocks)
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3.2%
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2.9%
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1.2%
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9.2%
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9.4%
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5.1%
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Dow Jones Global ex-U.S.
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3.4
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-1.7
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-11.5
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-0.7
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-1.9
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-0.4
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10-year Treasury Note (Yield Only)
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1.5
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NA
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2.4
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2.5
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3.2
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5.2
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Gold (per ounce)
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1.9
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26.2
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14.7
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2.5
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-2.0
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8.0
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Bloomberg Commodity Index
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3.1
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14.2
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-11.7
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-10.6
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-10.6
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-6.4
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DJ Equity All REIT Total Return Index
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4.8
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14.1
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22.6
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13.6
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12.1
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7.3
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S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron's, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
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