Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
Quarterly Market Overview: Q3 2016
The third quarter marked one of the least volatile market environments since 1971 as the S&P 500 did not move over 1% from close-to-close for 43 consecutive days. Few would have predicted such an outcome given Great Britain’s vote to leave the European Union two weeks before the quarter began, sparking a brief pullback and a heightened level of uncertainty. Ten year US Treasury yields reached an all-time low of 1.3% in the early part of July; however, this reaction wasn’t solely driven by Brexit. GDP in the U.S. had been averaging just 1% for three quarters in a row and job growth during the month of May had slowed to a paltry 11,000 jobs, casting doubt about the strength of the US labor market and the longevity of the current economic cycle.
The mood quickly changed though when we learned that jobs grew by a whopping 287,000 during the month of June, significantly higher than economists’ projections. This result allayed concerns of a meaningful slowdown. Additionally, as the quarter progressed, it became apparent that US GDP growth was returning to a 2% level and central banks around the world were prepared to pursue further stimulus, if necessary, to combat the impact of Brexit. Equity markets reacted favorably and a broad-based rally unfolded with large cap, small cap and international equities all participating.
Meanwhile, bond yields remained near their historic lows and market participants continued to reach for yield in other asset classes, specifically within the universe of higher dividend yielding equities. As a result, consumer staples, utilities and REITs (Real Estate Investment Trusts) were becoming over-valued. Further, REITs experienced a transitory boost as real estate stocks, previously classified as part of financials, were officially broken into their own sector. As REIT prices were driven higher by the technical buying that ensued, Sand Hill used the opportunity to reduce exposure in that area. REITs ended the quarter with a slight negative return while year-to-date performance remained robust at almost 13%.
We also focused our attention on commodities. Investing in commodities over the last three years has been a frustrating and humbling experience. Nevertheless, we would be remiss to ignore an asset class trading near what could be a generational low point. There are two reasons that we are increasingly likely to see continued improvement ahead. First, demand for natural resources would benefit if governments around the world turn to fiscal stimulus to support their economies. Oil and gas companies have also postponed large-scale development projects in the face of lower energy resource prices, making it only a matter of time before the over-supply contracts or disappear. During the quarter, oil prices dipped back down to $40 a barrel and we used that pullback as an opportunity to increase exposure. By the end of the quarter, oil prices had risen back to $50 a barrel and it appears as though OPEC and Russia may agree to limit output, a meaningful step towards bringing supply and demand back into balance.
In summary, the third quarter represented a nice change of pace as market volatility was relatively low and diversification, especially within the equity market, was rewarded. Maintaining a disciplined, diversified, approach to acquiring undervalued assets while paring back exposure to areas that become rich has been the cornerstone of Sand Hill Global Advisors’ investment philosophy for over 30 years and we intend to continue to employ this approach on behalf of our clients. While the narrow market of the last two calendar years challenged the view that a diversified portfolio generates a superior risk-adjusted return, we feel it is important to focus on a longer-term outcome and recent results suggest diversification is, once again, providing an attractive return without the need to take excessive risk.
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