Financial Markets Review by Mark:
U.S. Economy –
The steep drop in financial markets early in the year aggravated fears of a near-term recession. Since then the markets have rebounded allowing fears to subside, yet we now have warning signs from the U.S. economy itself. Hiring is weak, sales are slipping and new business investments are dropping. Manufacturing remains weak and corporate profits have not gained ground in 3 quarters. All of these are classic signs of an impending economic downturn. Uneven economic growth throughout our 7-year expansion has given us several such scares in the past. The latest excuse is to blame slow growth on the rest of the world: i.e. America would be booming if not for China, which would be booming if not for Europe, which blames Japan, which in turn blames America. With uncertainty increasing from Brexit and U.S. election cycles, we continue to forecast a recession in the next 12 – 18 months.
Much has already been written and read concerning the “Brexit” decision on June 23rd. It caught the financial markets off guard and sent equities and commodities down (except gold) as bonds and REITs went up; then we had a quick reversal. It is very hard to plan for binary outcomes (i.e. heads or tails scenarios), however our “all accounts composite” only dipped 5 basis points between the time of the vote and second quarter-end. Our low equity exposure and larger real estate and alternatives allocations resulted in continued gains for the year, despite a weak stock market.
Henry A. Kissinger commented eloquently on Brexit in the June 24th edition of The Wall Street Journal: “Too much of the Europe of today is absorbed in management of structural problems rather than the elaboration of its purposes. From globalization to migration, the willingness to sacrifice is weakening. But a better future cannot be reached without some sacrifice of the present. A society reluctant to accept this verity stagnates and, over the decades, consumes its substance. The needed restoration of faith will not come through recriminations. To inspire the confidence of the world, Europe and America must demonstrate confidence in themselves.”
Short term we see a weaker Europe, continued strength in the U.S. Dollar, low inflation and interest rates with further weak U.S. growth until the next recession.
CONTINUE READING: Third Quarter 2016 Newsletter – Optivest