Equity markets began the 2nd quarter continuing their upward trajectory off of February’s lows, but the ascent came to an abrupt end when the British caught markets by surprise and voted to exit the European Union. The result was a surprise to investors and induced an immediate flight to quality, instigating an equity market sell-off around the globe and lowering interest rates on government debt.
Fortunately, risk management strategies performed as expected. Immediately after the vote, the S&P fell 3.6% and the MSCI World Index plunged an even greater 4.8%. Contrarily, managed futures realized a 5% gain, global macro and market neutral strategies were virtually unchanged, and hedged equity declines were muted. By quarter’s end, markets settled down and US equities regained most of their losses as investors focused on the US economy.
For the quarter the S&P 500 gained 2.4%. This is the third consecutive quarter that the S&P 500 has managed to grow despite the opposite trend occurring in earnings. While the numbers aren’t out yet, if expectations are correct, the 2nd quarter will see another decline.
For fixed income investors, the vote for Brexit dashed any hope of the Fed raising interest rates this summer. With global growth expected to slow, rates all along the yield curve fell, with the long-end seeing a greater descent. The 10 year Treasury began the year yielding 2.27%, but by the end of the quarter the yield had fallen to 1.49%. Indeed, a good portion of debt around the globe offers negative yields.
Gold has benefitted from the increased uncertainty. At the beginning of the year an ounce was selling for $1,061, but by the end of the first half, gold had risen to $1,316 — a 24% increase. Commodities, up 12.8% for the quarter, were also helped by oil’s rise. A barrel of crude climbed $10 to end the quarter just below $50.
Another asset class that has experienced a turnaround this year and rewarded patient investors is emerging market bonds. Year to date, this asset class has produced returns just below 13%, as well. And despite the flight to quality, high yield bonds were aided by oil’s rise and continued to outperform, returning 4.2% during the quarter.
While the markets have recovered from the initial Brexit carnage, we are still guarded about the future. An exit from the Eurozone could lead to further disintegration within Europe and within countries in Europe. It is important to note that only England and Wales voted to leave, Scotland and Northern Ireland voted to remain. This could spell trouble for keeping the UK “united” which would increase uncertainty for markets in the not too distant future. Any economic fragmentation within the United Kingdom or Europe could impede trade and growth. As such, we stress the need to remain diversified with particular attention to risk management.
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.
Washington Trust Bank.