Investment Review

Fall 2016

In the third quarter of 2016, most major asset classes had very attractive returns. U.S. stocks were up 4.4%, international developed market stocks were up 6.3%, and emerging markets were up by a whopping 9.0%. Global REITs were down 0.2%.

 
Selected Headlines from the Past 12 Months Graphed with the World Stock Market Performance (MSCI All Country World Index)

 
We are not offering these headlines to explain market returns. But they do serve as a reminder that investors should view daily events from a long-term perspective and avoid making financial decisions based solely on the news.

 
Investment Review

Benchmark Funds	Q3 2016	12 Months Ending 9/30/2016
U.S. Large Cap Vanguard 500 Index Fund	+3.8%	+15.3%
U.S. Large Cap Value iShares Russell 1000 Value Index	+3.4%	+16.0%
U.S. Small Cap iShares Russell 2000 Index	+8.9%	+15.5%
U.S. Small Cap Value iShares Russell 2000 Value Index	+8.7%	+18.7%
International Vanguard Total International Stock Index Fund	+6.6%	+9.5%
Emerging Markets Vanguard FTSE Emerging Markets ETF	+8.1%	+16.7%
U.S. REITs Vanguard REIT ETF	-1.5%	+19.6%
Investment-Grade Bonds iShares Core Total U.S. Bond Market ETF	+0.4%	+5.2%

 
Individual Asset Classes

World Asset Classes

Looking at broad market indices, emerging markets outperformed all other equity markets during the quarter. The U.S. equity market lagged developed markets outside the U.S., while U.S. real estate investment trusts (REITs) recorded negative absolute returns and lagged the U.S. equity market.

The value effect was negative in the U.S. and emerging markets but positive in international developed markets. Small caps outperformed large caps in the U.S. and in international developed markets but underperformed in emerging markets

U.S. Stocks

The broad U.S. equity market recorded positive absolute performance for the quarter. Value indices underperformed growth indices across all size ranges. Small caps outperformed large caps.

International Developed Market Stocks

In U.S. dollar terms, international developed markets outperformed the U.S. equity market but underperformed emerging markets indices during the quarter. Small caps outperformed large caps in non-U.S. developed markets.

Looking at broad market indices across all size ranges, the value effect was positive in international developed markets.

Emerging Markets Stocks

In U.S. dollar terms, emerging markets indices outperformed both the U.S. market and developed markets outside the U.S.

Using broad market indices as proxies, the value effect was negative in emerging markets. Large cap value indices underperformed large cap growth indices. The opposite was true among small caps; small cap value indices outperformed small cap growth indices. Large cap indices outperformed small cap indices.

Real Estate Investment Trusts

U.S. REITs posted negative absolute performance for the quarter, lagging the broad equity market. REITs in developed markets recorded positive absolute returns but underperformed broad developed markets equity indices.

Fixed Income

Interest rates across the U.S. fixed income markets generally increased in the third quarter. The yield on the 5-year Treasury note rose 13 basis points (bps) to 1.14%. The yield on the 10-year Treasury note rose 11 bps to 1.60%. The 30-year Treasury bond increased 2 bps to finish with a yield of 2.32%.

The 1-year Treasury bill yield rose 14 bps to 0.59%, and the 2-year Treasury note yield increased 19 bps to 0.77%. The yield on the 3-month Treasury bill rose 3 bps to 0.29%, while the 6-month Treasury bill was up 9 bps to 0.45%.

Short-term corporate bonds gained 0.32%. Intermediate-term corporates rose 0.89%, while long-term corporate bonds gained 2.56%. Short-term municipal bonds returned -0.21%, while intermediate-term municipal bonds were unchanged. Revenue bonds slightly outperformed general obligation bonds.

In Conclusion

The country is preparing for an election characterized by more emotion than anyone has seen in recent history, yet this is not a reason to abandon a rational, disciplined portfolio strategy. We encourage clients to remember the importance of taking a long-term view of their investment time horizon. Read our investment commentary on Presidential Elections and the Stock Market. And for even more historical context, review our 2008 newsletter about the Obama vs. McCain tax plans and our 2012 newsletter on what could happen with President Obama’s reelection.