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: Bloomberg 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 Bloomberg 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 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: Bloomberg 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.