Markets in perspective – August 2016 in review – The calm after the storm

Capital Markets Returns Sources: U.S. Equity: Russell 3000® Index, Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index, Emerging Markets: Russell Emerging Markets Index, U.S. Bonds: Barclays U.S. Aggregate Bond Index, Global REITs: FTSE EPRA/NAREIT Developed Real Estate Index, Commodities: Bloomberg Commodity Index, Balanced: 30% U.S. Equity, 20% Non-U.S. Equity, 5% EM, 35% Bonds, 5% REITs, 5% Commodities. Following a strong market recovery in July from the Brexit selloff in June, markets took a breather in August and traded in relatively narrow ranges throughout the month. The S&P 500® Index had its second least volatile month in the last 20 years (based on daily standard deviation of the S&P 500 Index) and the CBOE Volatility Index hit its lowest level since 2014. Despite the uneventful end to the summer, most areas of the market were still able to generate positive returns for the month. Equities During a month when most equities were virtually flat, emerging markets continued their strong run in 2016 and had the best performance of all asset classes in August with a return of 2.28% (Russell Emerging Markets Index). This brings their year-to-date return as of August 31 to 13.48% and makes them the top equity performer for the year. Small cap stocks (Russell 2000® Index) also performed relatively well with a return of 1.77% which makes them the top performer for the third quarter so far as of August 31. All other areas of the equity markets were up less than 1.00%, with the exception of mid-caps (Russell Midcap® Index) which closed down -0.25% for the quarter.  Fixed Income The Barclays U.S. Aggregate Bond Index closed down -0.11% for the month of August as the yield on the 10-year U.S. Treasury Note rose 13 basis points, from  1.45% to 1.58% during the month. Non-U.S. fixed income fared much better: global high yield (BofA Merrill Lynch Global High Yield Index) returned 2.10% and emerging market debt (Bloomberg Barclays Emerging Market USD Aggregate Index) returned 1.39%. These areas continue to lead the way for fixed income in 2016 with returns of 13.64% and 12.60%, respectively, year-to-date as of August 31. Alternatives The only significant detractors during the month were alternative asset classes. Global real estate (FTSE EPRA/NAREIT Developed Real Estate Index) and infrastructure (S&P Global Infrastructure Index) fell -2.61% and -1.91%, respectively, in August due to the rise in interest rates during the month, while a pullback in the price of gold drove commodities (Bloomberg Commodity Index Total Return) lower. Despite the negative returns in August, alternatives are still posting strong gains for the year-to-date as of August 31, with global real estate (+11.34%) and infrastructure (+14.44%) still outpacing most other asset classes. Asset Class Dashboard – August 2016 The Asset Class Dashboard again improved on the previous month’s readings during August. For the third month in a row, all asset classes (with the exception of cash) have a 12-month return within their historical typical range. Additionally, all asset classes (with the exception of commodities) improved their 12-month return, with non-U.S. equity and global equity swinging into the positive return range. These improvements now mean that 13 of 14 asset classes posted positive returns over the last 12 months. Asset Class Dashboard Large cap U.S. equity: Russell 1000® Index, Large cap Defensive U.S. equity: Russell 1000 Defensive Index, Large cap dynamic U.S. equity: Russell 1000 Dynamic Index, Small cap U.S. equity: Russell 2000 Index, Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index, Global equity: Russell Developed Large Cap Index, Emerging markets: Russell Emerging Markets Index, Commodities: Bloomberg Commodity Index, Global infrastructure: S&P Global Infrastructure Index, Global real estate: FTSE EPRA/NAREIT Developed Index, Cash: Citigroup 3-Month U.S. Treasury Bill Index, Global high yield bonds: Bank of America Merrill Lynch (BofAML) Global High Yield Index, Emerging markets debt: JP Morgan Emerging Markets Bond Index Plus, U.S. bonds: Barclays U.S. Aggregate Bond Index. How do I read this chart? This dashboard is intended as a tool to set context and perspective when evaluating the current state of a sample of asset classes. The ranges of 12 month returns for each asset class are calculated from its underlying monthly index returns. The stated inception date is the first full month of an index’s history available for the dashboard calculation. Here is how to read the graphic on this page: FOR EACH INDICATOR, THE HORIZONTAL BAR SHOWS FOUR THINGS A GRAY BAR shows the full range of historical rolling 12-month returns for a sample of asset classes. A BLUE COLOR BAND represents the typical range (one standard deviation away from the mean, i.e. 68% of historical observations) of rolling 12-month returns for these asset classes. AN ORANGE MARKER represents the most recent 12-month return of the asset classes.

The Bottom Line:

August finished as a relatively quiet month without much market movement one way or the other. An investor in a hypothetical balanced portfolio would have closed the month almost exactly flat with a return of -.04%. Going forward, markets likely will be looking for some more certainty around corporate earnings and interest rates before determining what the next move will be. Maintaining a disciplined approach and staying diversified can help investors if volatility returns to the markets this fall.
Disclosures: Standard Deviation is a statistical measure that reflects the degree to which an individual value in distribution tends to vary from the mean of the distribution. Standard Deviation is a useful tool in measuring the historical typical range as 1 Standard Deviation includes approximately 68% of the historical values in a normal distribution. Using this measurement allows us to exclude the more extreme values which would not be as probable to see from the indicator. These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. This material is not an offer, solicitation or recommendation to purchase any security. Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Bond investors should carefully consider risks such as interest rate, credit, default and duration risks. Greater risk, such as increased volatility, limited liquidity, prepayment, non-payment and increased default risk, is inherent in portfolios that invest in high yield (“junk”) bonds or mortgage-backed securities, especially mortgage-backed securities with exposure to sub-prime mortgages. Generally, when interest rates rise, prices of fixed income securities fall. Interest rates in the United States are at, or near, historic lows, which may increase exposure to risks associated with rising rates. Investment in non-U.S. and emerging market securities is subject to the risk of currency fluctuations and to economic and political risks associated with such foreign countries. In general, alternative investments involve a high degree of risk, including potential loss of principal; can be highly illiquid and can charge higher fees than other investments. Hedge strategies and private equity investments are not subject to the same regulatory requirements as registered investment products. Hedge strategies often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and to political systems, which can be expected to have less stability than those of more developed countries. Securities may be less liquid and more volatile than US and longer-established non-US markets. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. S&P500® Index: The S&P 500® Index is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500® Index is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Russell Emerging Markets Index: Measures the performance of the investable securities in emerging countries globally. Constructed to provide a comprehensive and unbiased barometer for this market segment and is completely reconstituted annually to accurately reflect the changes in the market over time. Russell 2000® Index: measures the performance of 2000 issues representative of the U.S. small capitalization securities market. Russell Midcap® Index: measures performance of the 800 smallest companies (31% of total capitalization) in the Russell 1000 Index, with weighted average market capitalization of approximately $6.7 billion, median capitalization of $3.6 billion, and market capitalization of the largest company $13.7 billion. Barclays U.S. Aggregate Bond Index: An index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities, and mortgage-backed securities. (specifically: Barclays Government/Corporate Bond Index, the Asset-Backed Securities Index, and the Mortgage-Backed Securities Index). BofA Merrill Lynch Global High Yield Index: Tracks the performance of USD, CAD, GBP and EUR denominated below investment grade corporate debt publicly issued in the major domestic or Eurobond markets. Bloomberg Barclays Emerging Market USD Aggregate Bond Index: includes fixed and floating-rate U.S> dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers. Country eligibility and classification as Emerging Markets is rules-based and reviewed annually using World Bank income group and International Monetary Fund (IMF) country classifications. FTSE EPRA/NAREIT Developed Index: A global market capitalization weighted index composed of listed real estate securities in the North American, European and Asian real estate markets. S&P Global Infrastructure Index: provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe. The index has balanced weights across three distinct infrastructure clusters: utilities, transportation and energy. Bloomberg Commodity Index Total Return: Composed of futures contracts on physical commodities. Unlike equities, which typically entitle the holder to a continuing stake in a corporation, commodity futures contracts normally specify a certain date for the delivery of the underlying physical commodity. In order to avoid the delivery process and maintain a long futures position, nearby contracts must be sold and contracts that have not yet reached the delivery period must be purchased. This process is known as "rolling" a futures position. The S&P Global Infrastructure Index: Provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe. 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