The most accurate assessment of Q3 2016 is that it was interesting. While positive overall, we saw the markets trade on the most important thing: earnings. Earning predictions were low—too low in fact. A majority beat the expected low metric set and we saw a net rising stock market. Using the following explanation, it makes sense: companies increase in value as they do well, and gains are made on their limited equity shares. This connection has been lost as we’ve been wading through some less fortunate news the past few years.
With all of this being said, we can’t guarantee a stable road closing out the year. A few situations have arisen that account for this analysis: inadequate global growth, uncertainty about the Federal Reserve’s next steps, and an incredibly volatile and strange presidential cycle. We’re left with only one assured outcome: a new president.
Listed below are returns of five major indexes, through the third quarter;
BarCap US Agg Bond -- 5.80%
S&P 500 -- 7.84%
Russell 2000 -- 11.46%
MSCI EAFE (Europe) -- 1.73%
MSCI EM (Emerging Markets) -- 16.02%
Looking at our five portfolios in Q3, we can see that they outperformed, with Technology, Emerging Markets, and domestic Small Cap leading the charge. Our Energy allocations also did well, but remains an area that will possibly be reduced as oil reaches a $55/barrel price. We’re keeping an eye on High Yield fixed income for largely the same reason: it’s an opportunity to cash in on returns and look for greater value. In addition, Apple is back on track in individual positions, as it rose 19% within the S&P 500 in the third quarter.
Closing out the year, it’s fair to assume there will be some volatility, mostly caused by the uncertainty surrounding Brexit and the presidential election that is coming to a close. Aside from these factors, we anticipate a solid quarter with good stock returns. Our favor is instilled in our Tech, Emerging Markets, Small Cap stocks and Energy positions. We predict Financial positions to benefit greatly and start to outperform as interest rates begin to rise. This also means we’ll look into staying away from areas impacted by interest rates such as bonds, Utilities and Real Estate Investment Trusts (REITs).
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