After the surprise of Brexit at the end of June, international developed markets ended down for the quarter. The other major indices had positive returns for the quarter.
We’ve graphed the headlines over the past year to world stock market performance, and then reviewed the performance of each major asset class.
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.
|Benchmark Funds||Q2 2016||12 Months
|U.S. Large Cap
Vanguard 500 Index Fund
|U.S. Large Cap Value
iShares Russell 1000 Value Index
|U.S. Small Cap
iShares Russell 2000 Index
|U.S. Small Cap Value
iShares Russell 2000 Value Index
Vanguard Total International Stock Index Fund
Vanguard FTSE Emerging Markets ETF
Vanguard REIT ETF
iShares Core Total U.S. Bond Market ETF
Individual Asset Classes
World Asset Classes
Looking at broad market indices, the U.S. outperformed developed markets outside the U.S. and emerging markets. U.S. REITs recorded the highest returns, outperforming the broad equity market.
The value effect was positive in the U.S. but negative in developed and emerging markets. Small caps outperformed large caps in the U.S. but slightly underperformed in the developed and emerging markets.
The broad U.S. equity market recorded positive absolute performance for the quarter. Value indices outperformed growth indices across all size ranges. Small caps outperformed large caps.
International Developed Market Stocks
In U.S. dollar terms, developed markets outside the U.S. lagged both the U.S. equity market and emerging markets indices during the quarter. Small caps slightly underperformed large caps in non-U.S. developed markets.
The value effect was negative in non-U.S. developed markets using broad market indices across all size ranges.
Emerging Markets Stocks
In U.S. dollar terms, emerging markets indices underperformed the U.S. but outperformed developed markets outside the U.S.
The value effect was negative in emerging markets using broad market indices. 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. Small cap indices slightly underperformed large cap indices in emerging markets.
Real Estate Investment Trusts
U.S. REITs had very strong positive returns for the quarter, outperforming the broad equity market. REITs in developed markets recorded positive returns, also outperforming broad developed equity markets indices.
Interest rates across the U.S. markets generally decreased during the quarter. The yield on the 5-year Treasury note fell 20 basis points (bps) to end at 1.01%. The yield on the 10-year T-note decreased 29 bps to 1.49%. The 30-year Treasury bond declined 31 bps to finish with a yield of 2.30%.
The 1-year T-bill ended the quarter yielding 0.45% and the 2-year T-note finished at 0.58%, for declines of 14 and 15 bps, respectively. The 3-month T-bill increased 5 bps to yield 0.26%, while the 6-month T-bill dipped 3 bps to 0.36%.
Short-term corporate bonds gained 1.05%. Intermediate-term corporates returned 2.24%, while long-term corporate bonds returned 6.64%. Short-term municipal bonds returned 0.66%, while intermediate-term municipal bonds gained 1.84%. Revenue bonds slightly outperformed general obligation bonds.
In 2016, the value and small cap premiums returned to U.S. markets. A portfolio with a “value tilt” and “small cap tilt” can be challenging to hold over shorter time periods, since returns don’t come nice and even; however based upon past history, over long periods of time pursuing this discipline has rewarded our clients and other investors who practice this strategy.