Markets in perspective – September 2016 in review – Wrapping up a strong 3Q16 on balance

Capital Markets Returns September 2016 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 After a quiet month of August, volatility quickly returned to the markets in early September when the S&P 500® Index had its largest one-day pull back since the Brexit vote in June. As September wore on, calm essentially was restored and most markets were able to recoup their losses from the start of the month. All major equity indexes and most asset classes were still able to post positive returns for the month and by September 30, all asset classes were back in positive territory on a year-to-date basis, having shaken off the remnants of the volatile start to the year. Equities For September, U.S. large cap (Russell 1000® Index) stocks finished up slightly with a return of .08%. U.S. small cap stocks (Russell 2000® Index) and international developed (Russell Developed ex-U.S. Large Cap Index NR) fared much better and outperformed U.S. large cap by more than 100 basis points. The best equity performer for the month was once again emerging markets (Russell Emerging Markets Index NR), thereby continuing the recovery streak it’s been on for most of 2016. Emerging market stocks also continue to be the top equity performer for the year to date, posting returns of over 15%. Real assets It was another solid month for real assets as commodities (Bloomberg Commodity Index) was the best performing asset class in September, with a return of 3.1%. This was in part due to a strong rally in the price of oil at the end of the month following OPEC’s announcement that they plan to cut production for the first time in 8 years. After the announcement, the price of Brent Crude rose from under $45 per barrel to over $48 within a few days. Fixed income & interest-rate sensitive asset classes The only detractors for the month came from interest rate sensitive asset classes, such as core fixed income (Barclays U.S. Aggregate Bond Index) and real estate (FTSE EPRA/NAREIT Developed Index) as the U.S. 10-year Treasury yield rose from 1.58% to 1.60% between the end of August and the end of September. Despite the rise in interest rates, global high yield (BofAML Global High Yield TR Hdg) and emerging markets bonds (Barclays EM USD Aggregate TR) continued their surge this year and are now up 14.3% and 12.8%, respectively, for the year to date. Asset Class Dashboard – September 2016 For the fourth month in a row, nearly all asset classes tracked in the Asset Class Dashboard had a 12-month return within their historical typical range. Cash continued to fall below its 12-month historical typical range and Emerging Market Debt nudged just above its 12-month historical typical range. Additionally, nearly all asset classes (with the exception of U.S. bonds) improved their 12-month return. This means that not only did 13 out of 14 asset classes post positive returns for the past 12 months, but 10 of them also posted double digit 12-month returns. Asset Class Dashboard September 2016 Source: 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

Diversification helped a hypothetical index portfolio in September. Although traditional asset classes such as U.S. large cap stocks and core fixed income were essentially flat, emerging markets equities, global high yield fixed income and commodities helped to produce positive returns for a hypothetical diversified index portfolio. An investor in a hypothetical balanced index portfolio would have returned 0.5% for the month, bringing the year to date return for such a portfolio to 6.8%. As we enter the 4th quarter of 2016, a lot of uncertainty still remains regarding corporate earnings, interest rates and the U.S. election cycle. However maintaining a diversified approach to investing may offer the highest chance of success even though diversification doesn’t protect against all loss or guarantee a profit.