Market Review

One of the biggest surprises this year may be how staid the markets remained regardless of news, global events, and economic data. In January, we saw the first presidential change in eight years. Many feared that the tweeting and rhetoric common during the campaign may have an impact on financial asset prices. Instead, even with a senior administration official resigning, news of an FBI investigation, and the failure of signature legislation, markets barely moved. 

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Economic statistics continued to provide a mixed message about the strength of the economy, with trade and GDP figures disappointing but payroll and retail sales data showing some improvement. Inflation ticked up and core CPI hit 2.3% year-over-year, high enough to raise red flags for Fed watchers. In fact, the Federal Reserve meeting minutes released mid-month led a number of investors to believe that the Fed was moving toward a more hawkish stance.

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The market continued to be focused on potential policy changes by the new administration. Discussions around tariffs and border taxes have been somewhat disconcerting. The policy focus has been geared more towards immigration and the Affordable Care Act, rather than tax cuts and fiscal policy.

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What a difference a couple of events make. Or more precisely, a number and a vote. While we anticipated writing a quarterly commentary that detailed the typical gyrations of the bond market – “disappointing economic data releases in April followed by positive growth news in May, modestly lifting then depressing bond prices” – a June payroll number and the Brexit vote stole the show.  

Yields began to climb again as economic releases started to look promising, but this was a very short-lived trend as June 23 brought the Brexit vote. Markets were taken aback as U.K. citizens unexpectedly voted to leave the European Union. The vote threw global financial markets into turmoil and engendered a flight to quality. Treasury yields dropped precipitously and the yield curve flattened.

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The U.S. economy began 2015 at a feeble pace, weighed down by the West Coast port closing and a brutal winter through the central and eastern portions of the country. Reflecting the economic softness, interest rates fell dramatically during January 2015, with U.S. Treasury benchmarks hitting their low yields for the year by February 1. The 10-year was a stunning 46 bps lower for the month, yielding 1.77% on January 31, with some market prognosticators proclaimed it was headed toward 1.25%. 

Instead the weakness proved transitory. When rates bounced back in the spring, they remained in a relatively tight range. This was surprising given the elevated geopolitical and economic events.

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