Just when you thought that we might make it through one quarter without financial markets being sent into a panic by a headline news event . . . . Brexit! The vote, which was held on June 23, sent ripples of panic across global financial markets as investors digested the news and quickly readjusted their portfolio exposures. Despite the swiftness and shock with which the news of Brexit hit financial markets, within a few days most markets around the world began to show signs of recovery. In the US, stocks rallied in the last 3 days of the quarter to finish both the quarter and the first half of the year in positive territory. While we have endured a year with heightened volatility in financial markets, most diversified portfolios will end the second quarter with positive performance for both the quarter and year to date.
In equity markets, value stocks have outperformed growth stocks thus far in 2016 by a wide margin, with the Russell 1000 Value up 6.3% and the Russell 1000 Growth up only 1.4% year-to-date through the end of the quarter. The best performing sectors have been telecoms and utilities, stocks that typically pay high dividends. These two sectors are a relatively small part of the market however, making up only 6.5% of the S&P 500 in total. Financials and technology stocks have been the laggards, and these are the two largest sectors, making up a total of 35.5% of the S&P 500. Foreign markets continue to trail US markets, with European and Japanese stock markets being hit particularly hard.
Since this year’s low in February ($26.19/bbl for WTI on February 11), oil prices have rallied 84% to close the quarter at $48.27/bbl. These higher oil prices provided support for the energy sector, which rallied strongly and was the best performing equity sector in the second quarter. Notwithstanding the price rally in crude, it remains well below where it stood in 2014 when prices were above $100/bbl.
Brexit also provided the pretext for another flight to quality in bond markets with investors across the globe rushing to buy US Treasuries and other assets perceived to be “safe.” This most recent buying spree caused the yield on the 10-Year US Treasury to fall to 1.49%. With an inflation rate of 2.24% the real yield on the 10-Year Treasury ended the quarter at -0.75%, well below the historical average (last 58 years) of a real yield of 2.44%. This dramatic flattening of the yield curve has been a positive for bond investors, particularly those owning longer-duration bonds. Those owning bonds denominated in US dollars have been further rewarded as the global flight to quality at quarter-end led to further strengthening of the US dollar against most other currencies.