Economic Update 6-27-2016

• Most global attention was focused on the U.K. ‘Brexit’ referendum, which was assumed to be doomed to failure earlier in the week—until final results showed it passed by a small margin.  In a slower week for U.S. economic releases, housing results were mixed, with home prices higher but building activity lackluster.

• Equity markets gained ground early in the week globally as concerns over ‘Brexit’ dissipated before actual voting but reversed as results came through, causing a broad sell-off of risk assets.  Bonds fared well in the week in response, and commodity markets declined with oil and agricultural futures falling back as well as a stronger U.S. dollar.

Stocks rose early in the week as global concerns over Brexit dissipated, until Friday, when the actual voting resulted in a surprise win.  From a sector standpoint in the U.S., every industry ended in the negative, with utilities, energy and consumer staples earning the smallest losses, and financials, materials and cyclicals suffering the worst with declines over -2% for the week.

Foreign stocks in Europe unsurprisingly experienced the most negative returns, but the bulk of the net damage was due to a gain in the U.S. dollar, as local market results were flat to even positive on net.  The U.K. and Europe were both down -10% on Friday, which offset gains earlier in the week from the premature relief rally—the financial sector performed significantly worse.  In terms of one-day market reactions, this was significant.  The British pound took a severe pounding, pardon the pun, in fact, reaching its lowest value against the dollar in 30 years, but much of this was less severe than it seemed due to same run-up in prior days.  Peripheral European stocks in Greece, Italy and Spain suffered much more due to the resulting uncertainty about the EU’s durability.  Emerging markets were surprisingly less affected, with generally flattish results on net.  In asset allocation portfolios, European/U.K. financials have not been significantly held due to embedded risks, in favor of consumer firms with growth prospects that tend to be a bit more macro-agnostic.

U.S. bonds fared decently, as rates declined in response to the sell-off in risk assets, which benefitted both government and corporate bonds.  The 10-year Treasury note temporarily fell below the 1.5% level, the lowest yield in four years, which continues to defy expectations of a gradual move upward.  Foreign bond yields also fell both developed and emerging nations as investors embraced fixed income.  In the U.K., the 10-year gilt reached an all-time low of just over 1.0% while German and Japanese bond yields fell deeper into the negative upon high buying interest.

Real estate in the U.S. and Asia was generally unaffected by global events for the week, with minimal losses, while Europe lost ground.

Commodities declined generally due to the flight from risk on Friday, with broad indexes down a few percent.  As expected, precious metals ended in the positive for the week, with investor seeking the perceived safe haven of gold, while industrial metals also gained.  After reaching $50 again earlier in the week, crude oil pulled back to $47-48 range.  Agricultural commodities also lost ground with large drops in corn, wheat and soybeans due to weather changes and an unwinding of some speculative activity.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.