The S&P 500 was up 3.85% for the three-month period ending September 30th, 2016, while the MSCI World Index was up 4.99%. During that same period, the Bloomberg Barclays US Aggregate and the J.P. Morgan Global Aggregate Bond indices had a total return of 0.45% and 0.69%, respectively. Once again, the main global macro drivers were the central bankers. The Federal Reserve Bank (FRB) kept the Fed Funds rates in the US unchanged while the European Central Bank (ECB) and the Bank of Japan (BOJ) also maintained their loose monetary policies in place. In a historic move, the Japanese Central Bank disclosed a new bond-buying program that suggested a floor at a 0% yield on 10 years bonds!
Voters all of over the world began sending strong messages of discontent to their leaders. In the Philippines, a very controversial and volatile candidate, Rodrigo Duterte, was elected as the new President. Since his swearing-in ceremony, several thousand extra-judicial murders have taken place, all in the name of ridding the nation of its drug problem. In Colombia, President Juan Manuel Santos’ attempt to negotiate a deal with the FARCS, for which he won a Nobel Peace Prize, could not be ratified in a push back by the populace. In Brazil, President Dilma Rousseff was impeached and continues to face allegations of corruption related to the Car Wash investigation. British Prime Minister Theresa May was sworn into power after United Kingdom’s referendum vote to leave the European Union. A more recent, and perhaps an early, signal of the potential distress in the European financial system manifested itself through the significant decline experienced by the stock of Germany’s Deutsche Bank. The Euro and the British Pound declined dramatically as the markets started to climb the wall of worry.
As we begin the final quarter of calendar 2016, global economic uncertainty reigns supreme, with the International Monetary Fund (IMF) having decreased its global growth expectations for the near to midterm. Questions are arising as to whether the unprecedented easing undertaken by central banks has actually resulted in greater economic growth. With trillions of dollars of fixed-income assets providing negative yields, have savers all over the world been “guided” into higher risk assets such as “junk” bonds or equities? As a result, is a new financial bubble being created?
At the moment however, the US election next month is “front and center” when it comes to asset pricing. It is fair to argue that a Democratic win will reflect less uncertainty in the markets, whereas a Republican victory could very well add to volatility across the board. As an example, one can look at the ”ups and downs” in the value of the Mexican Peso with each debate and the multiplicity of polls. The outcome of the U.S. election will be an interesting test of as to whether there is a disconnect between our nation’s leaders and its citizens!
Finally, it appears that the ECB will slowly begin to taper its bond buying program in the months ahead. We also believe that the data dependent FRB is more likely to move forward with a slight tightening in December. Stay tuned and please vote!