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The Fiduciary Focus Blog

Capital Markets Review - Third Quarter 2016

Benjamin Smith, CFA 03 November, 2016

stock-marketThe Presidential Election Heats Up....

Global economies are turning their eyes to the US presidential election. Although world markets and economies absorb this leadership change every four years, the stakes are higher this year due to the unique characteristics of the two candidates. Mr. Trump has made much of the election about unfair international trade (job losses, national debt, and unfair trade deals). Many countries rely heavily on exports to the US to grow their economies, and Mr. Trump’s view that the Federal Reserve Bank is too political could push interest rates higher and the dollar could surge. Trump supporters like the idea of bringing back jobs in previously exported production industries, such as manufacturing, to spur US economic growth.

Ms. Clinton is considered a status-quo candidate and while not ideal for all economy stakeholders, supporters suggest that the status quo has benefited many global investment markets. Clinton detractors point to the potential costs of programs such as higher minimum wages, combating climate change, and tuition-free college.

Internationally other countries are concerned if the wave of echoed Brexit sentiments continue, namely international trade debate and economic sovereignty, or if the century long momentum of globalization re-starts.

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US Economic News

Among major economic data released, second quarter U.S. GDP growth was revised up to 1.4% (from the previous estimate of 1.1%), the Consumer Confidence Index jumped, and the personal consumption expenditures (PCE) deflator showed little inflation. Additionally, the price of crude oil jumped, as OPEC reached a production-cut deal.


The third quarter of 2016 began with a move upward for risk assets. This was surprising due to England’s decision to leave the European Union at the end of ‘16. Emerging and developed market indices outperformed the S&P 500, and within the U.S., small caps outperformed their large cap counterparts. Equity investors spent much of the summer confident that growth would remain slow but steady, and that monetary policy would remain accommodative.

Fixed Income

In anticipation of money market regulations going into effect on October 14, outflows from prime money market funds (MMFs) accelerated while government MMFs attracted inflows. Through August 2016, prime MMF assets had declined to $797 billion from $1,286 billion on 12/31/15. In concert with these movements, three month LIBOR increased nearly 19 bps to 84 bps during August. The market’s supply and demand imbalance caused banks to pay-up to attract term funding, further steepening the LIBOR curve. The remainder of the US Yield Curve continued to flatten, influencing a positive return on fixed income prices.


To download our  entire Capital Markets Review with index returns ,  topical charts and graphs of interest, and this commentary, please download here.

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