Despite Britain’s decision to exit the EU in the 2nd quarter, the 3rd quarter was marked by risk-on investing as riskier assets, in general, outperformed less risky assets. Emerging and developed international stocks outperformed US stocks, and in the US, small caps outperformed large caps.
For most of the summer, volatility remained at bay as investors remained confident that central bank policy would stay accommodative. The S&P 500 gained 3.85% for the quarter, and the EAFE Index gained 6.50%. YTD, the S&P 500 has grown 7.84% while the EAFE has returned 2.27%. Emerging market stocks returned nearly 10% for the quarter. Real return assets (commodities, real estate, infrastructure) continued to have a good year as well, with most asset classes providing double digit or close to double digit returns. To note, the main exception for the quarter was commodities — one of the better performers in the 2nd quarter became one of the worst in the 3rd, with a gain of less the 1%. Both gold and oil were negative contributors, with oil losing $2 a barrel and settling at just above $48/bl., while gold lost a little over $6/oz. to close above $1,315/oz.
As the expectation of a near-term Fed rate increase diminished, yields continued to decline. The 10-year Treasury ended the quarter yielding 1.60% — it began the year with a 2.27% yield. Like their equity counterparts, riskier fixed income assets outperformed as well. High yield bonds have gained over 10% through the first three quarters and emerging market bonds have advanced even further.
We expect volatility spikes during the 4th quarter due to the fervor of the presidential election and the final Fed meeting of the year. Although the Fed left rates unchanged in September, investors are anticipating an increase in December. Of course, with Fed officials continually contradicting each other, the probability of future volatility remains high. As a result, risk mitigating strategies underperformed this quarter although their potential benefits remain. As always, we urge investors to remain diversified and pay particular attention to downside protection.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Rick Cloutier, PhD, CFA is the Chief Investment Strategist for Washington Trust Bank with over 25 years of portfolio management and investment experience. He is responsible for directing the portfolio management, research, and trading activities for the bank’s multi-asset class strategies. He is also responsible for overseeing the client portfolio manager team and portfolio analytics team. Rick has written numerous articles for Investopedia and wrote a weekly column for the Fall River Herald News in Massachusetts. His research has appeared in numerous journals, including the Journal of Investment Management and Financial Innovations, the Journal of Business Management and Economics, and the International Journal of Revenue Management. He provided a nightly commentary on WALE radio and authored the novel Caveat Emptor. Rick earned his BS from URI, MBA from Boston University and PhD from SMC University.