Sunday, July 3, 2016

Asset class performance for June - Still a bond world

Take-away all of the crazy market behavior surrounding BREXIT and you are left with investment performance that centered around falling interest rates for June. This was a continuation of the main story for 2016. Given the June market uncertainty, this should not be surprising, but a look at where we are at the end of the first half of the year is surprising.

Let's go back to the end of last year and remember what many were thinking. The Fed raised rates in December and made clear that this would the first of a number of up moves. The US economy was looking stronger. While Europe was still under pressure, there was the general belief that the ECB could nudge growth upwards. There were concerns about Chinese credit quality, but BREXIT was not a concern. Credit was looking dangerous given the low price of oil albeit there was some talk of a price bottom. There were concerns about equities, but not because of global uncertainty or dislocations in politics. Many pundits on asset allocation got it wrong.

The clear winner was holding long bonds; long duration in the US, the EU, or anywhere in the world. The biggest winner was commodities after a horrible year in 2015. Diversified global equities did poorly but credit showed strong gains even with higher bankruptcies. 

Asset allocation forecasts for the first half of the year, in general, have proved wrong. The only winners were those investors who followed the price action in trends. 

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