Like the finale at a Fourth of July fireworks show, the second quarter of 2016 concluded with a bang. After the United Kingdom (UK) voted to leave the European Union (EU), the S&P 500 proceeded to decline 5.3% over the next two days. Then immediately shifting course, the S&P 500 closed the month with four straight positive days, ending the quarter up 2.5% (+3.8% for the year). The MSCI EAFE experienced a similar week, albeit much more pronounced, by losing 1.5% for the quarter, and bringing the year-to-date return to -4.4%.
In Q2, emerging market equities did not perform as well as US equities (MSCI Emerging Market +0.7% in Q2) but continued strong positive momentum after a tough 2015. The MSCI Emerging Markets is up 6.4% for the year.
Uncertainty in the European Union
As could be expected, the decision by UK voters to leave the EU was the biggest news of the quarter and sent shockwaves through the global markets. The British pound has fallen drastically ($1.30 as of 6/30/16: lowest level since 1985) along with US Treasury yields (10-year treasury note down to 1.49% as of 6/30/16) as investors looked to the US as a "safe-haven" during the turmoil. Even though it could take two years to fully execute, there remains a lack of clarity surrounding the process and the consequences of leaving the union. In the coming weeks and months, markets will be looking for clarification on three issues: UK leadership (Theresa May's appointment as Prime Minister may provide some assurance), trade agreement negotiations (with the EU and rest of world) and likelihood of other EU members following the UK out of the union.
Central Bank Policy
The Fed was obviously concerned about the impending UK vote to leave the EU. Janet Yellen stated that it was one of the factors discussed in the June FOMC and the decision would have consequences for the global financial markets and US economic outlook. In choosing to not raise the Fed Funds rate, the Fed provided a mixed overall picture of the US economy; showing improvements in economic activity and the housing sector while labor markets have slowed. Inflation continues to hover below the 2% target.
Fear and the Markets
On a more somber note, the airport attack in Istanbul, the night club massacre in Orlando and the Belgium bombings continue to unsettle the world. These tragic events seldom impact financial markets on their own, but compounded, they cultivate a sense of fear. Financial markets will react and political policy will be influenced, but the uncertain nature of these events makes the impact hard to predict. This uncertainty is nowhere near as meaningful as the unnecessary loss of life, but will surely be a topic to be followed throughout the rest of 2016.
Technology IPO Market
Despite the volatility and uncertainty in the global public markets, on June 22nd, Twilio Inc. was able to price its IPO at $15/share, above its range of $12-$14/share. As of quarter-end, the stock was trading at $36.50. Technically the second technology IPO of the year, it's a positive sign that is was able to raise money in the public markets and increase its value from the prior funding round.
Investors are still hesitant to overreact, as the bad taste of 2015 IPOs from Fitbit, Pure Storage, Box and Square lingers. There remains a large list of private technology companies that if under different circumstances, would likely try to take advantage of the public markets, as evidenced by an uptick of open filings over the past few months. It is still unclear what the market appetite is for these companies and more importantly, how ready these companies are for the rigors of being publicly traded. With only six months left in 2016, it will be interesting to see if any other companies try to follow suit.
It is unclear what the second half of 2016 will bring. Markets are torn and volatility will continue. It's important to recognize that short- and even medium-term market volatility is normal and expected. If you'd like to understand how these recent events could affect your investment strategies, we'd be happy to discuss with you. Contact us at firstname.lastname@example.org
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