The third quarter of 2016 provided a necessary respite from the volatility in the equity markets that we had seen for at least the prior twelve months. The S&P 500 returned slightly over 3.3% for the quarter, and the year-over-year return is north of 12%.
While the equity markets performed well, the United States economy still has significant challenges it must contend with:
high levels of underemployment
low inflation bordering on, in many cases, deflation
a highly contentious election cycle
Fortunately, there are also a significant number of positives on the economic front including low overall unemployment, positive—though moderate—corporate earnings, and increasing consumer confidence, which is buoying consumer spending.
US home prices continue to recover from post-financial crisis lows, driven by low mortgage rates and lean inventory levels; though, new home construction permits have yet to pick up to levels seen prior to the crash—due to limited access to credit and increased building costs.
US equities advanced, and expectations rose that the Federal Reserve (Fed) would increase rates again before the end of 2016.
Emerging market equities delivered strong returns as investors focused on high-yielding assets. Among the equity markets to benefit most were Brazil, Russia, and South Africa.
In bond markets, the 10-year Treasury yield climbed over the period; however, corporate bonds performed more strongly.