Following an initial downturn largely in response to June's Brexit vote, equities rebounded during the month of July.
The impact of Brexit on the global economy will play out over the months and years to come. We expect markets will be more volatile as the outlook for the global economy becomes more uncertain.
In late July, the Federal Open Market Committee opted to keep rates unchanged. We now believe the likelihood of a Fed rate hike this year has increased, if economic reports continue to be positive.
The fundamentals for oil have not changed. Oil prices will likely remain soft due to excess supply and tepid global demand.
Second quarter earnings were released throughout July, as 76% of S&P 500 companies announced results by early August. According to S&P, 66% of companies beat analysts’ consensus estimates, which is in line with historical averages. We expect that earnings will improve throughout the balance of 2016.
The market broadened in July driving equities to all-time highs. Valuations for defensive stocks remain elevated, but continue to be attractive to yield-seeking investors.
We believe U.S. stocks will outperform foreign stocks in the near term, due to more reliable earnings prospects and stable economic growth.
European and Japanese economies continue to stagnate despite ongoing stimulus. We believe that these economies will experience tepid growth for the remainder of the year.
Our long term outlook for emerging market equities is positive however, we are cautious in the near term and have slightly reduced our allocation. We need to see stronger global economic growth and improved trade flows for us to become more positive.
Despite historically low yields in the U.S., we expect bond returns in the U.S. to be better relative to the rest of the world. Globally, there is over $12 trillion in foreign sovereign debt yielding less than zero percent. We currently have no exposure to international developed debt.
We share the market’s concerns about the slowing pace of growth globally. Given current market conditions we favor a broadly diversified approach to portfolio management.
Sources: Folio Dynamics
- This information has been compiled using data and other statements of fact derived from sources which we believe to be accurate and reliable. However, such data and other statements of fact have not been verified by us, and we do not make any representations as to their accuracy or completeness. Any opinion expressed herein reflects our judgment at this date and is subject to change.