Q2 2016 Quarterly Review

Q2 2016 Quarterly Review

Volatility and sluggish growth remained the key factors influencing the markets during the second quarter of 2016. The norm in economic data and the equities markets has been
two steps forward and one step back. Expectations that the Fed would turn more hawkish at its June meeting kept the US markets in a broad and flat trading range for the majority
of the quarter. A dismal May jobs report and murky economic data led to a dovish tone from the Fed and sent US markets higher entering June. The second half of the quarter
was dominated by the Brexit vote. Markets see-sawed into the vote before spiking upwards after the “Remain” campaign seemed to gain significant traction. Market expectations
were proven to be wrong and the Leave vote took nearly everyone by surprise. Global markets sold off at an incredible pace following the announcement but recovered a large
portion of the losses within a week.

Domestic Equity

U.S. stocks continued to trade in a narrow range despite an uptick in volatility. Including the sell-off following the Brexit vote, the S&P 500 peaked at 2.88% for the quarter and
bottomed out at -2.87%. If we remove the Brexit reaction the range becomes even tighter with the low drawdown for the quarter coming in at 0.96%. Overall, the S&P performed
well, returning 2.46%, the DJIA returned 2.07% and the NASDAQ lagged returning -0.23%. Consumer-related economic measures, housing, and energy were the bright spots in
the US markets during Q2. Energy stocks were the top performing sector for the quarter, rising 11.2% as oil rose throughout the quarter. Technology related companies were hit
hard by the Brexit vote, ending the quarter down 2.0% which was the worst performance of any sector.

Foreign Equity

Although it happened near the end of Q2, Britain’s vote to leave was by far the biggest event of the quarter. Despite the surprise “Leave” vote, UK equities came out of the
whirlwind of volatility relatively unscathed with the FTSE All-Share Index down 2.6% for the quarter. The sharp reversal of the Brexit losses was driven by investors’ expectations
that the weakened sterling would boost earnings which are predominately driven by overseas demand. Additionally, the markets were supported by Bank of England governor Mark
Carney commenting that the central bank will consider providing additional monetary stimulus to the domestic economy. As expected, Euro-area stocks suffered the greatest fallout
from the Brexit vote. The MSCI EMU began the quarter in positive territory but the gains were reversed following the UK referendum decision and the index declined 4.7% for
the quarter. Japan’s Nikkei 225 Index posted returns of -2.0%. The Japanese market was dragged down by strong appreciation in the yen which was up 9% against the dollar over
the quarter. The stronger currency hurts Japanese export companies and increases the difficult task of boosting domestic inflation. The markets were also negatively impacted by
the central bank decided to keep its monetary policy unchanged at its April meeting. The consensus had been for an extension of the negative interest rate policy and the asset
purchase program. The MSCI Emerging Markets index underperformed U.S. markets but generated positive returns of 0.8% for the quarter. The BRIC countries were back in focus
during Q2 as Brazil’s market rebounded following the suspension of President Dilma Rousseff on impeachment charges. Russia benefitted from a more than 25% increase in the
price of Brent Crude oil. India posted solid gains following the central bank’s announcement that it would cut its key rate. Chinese equities were relatively flat for the quarter.
Export and import data was relatively mixed but stable enough to indicate the Chinese economy is not collapsing.

Fixed Income

After picking up slightly during April, global interest rates reversed course and ended lower for the quarter (U.S. 10-year from 1.78% to 1.49%). Japanese and European yields
were pushed lower by the continuation of QE and U.S. rates edged lower due to risk-off trading near the end of the quarter and strong foreign demand. Thirty-six percent of
government bonds were trading in negative territory at the end of the quarter and seventy-four percent were trading at yields of less than one percent. The poor May jobs report
and the decline in the probability of a June rate hike from the Fed nudged investors back into fixed income trades. The Barclays Aggregate Bond Index was up 2.2% for the
quarter. Long-term U.S. government bonds were up 6.0%, outperforming all other bond sectors for the quarter. Corporate credits performed well. U.S. high yields were up 9.1%
for the quarter, benefiting from rate compression during the month of April.

Alternative Investments

Commodities saw a jump during the quarter led by a surge in oil prices as the U.S. dollar plateaued early in the quarter and contracted 7% before recovering slightly near the end
of the quarter. Brent crude oil prices were up 25.5% during the quarter, and are now up 33.3% for the year. Real estate performed well on the back of an increase in home prices
and reports that indicated supply levels are struggling to keep up with demand. Demand has been positively influenced by the prolonged period of lower rates which has lowered
borrowing costs. US REITs, continued their strong performance for the year as the Dow Jones US Real Estate index was up 6.8% for the quarter. International REITs were hurt at
the end of the quarter due to European exposure. The Dow Jones Global ex-US REIT index was up 0.9% for Q2. Gold continued to perform well as investors sought out volatility
and inflation hedges. Gold was up 6.8% in Q2, bringing its year to date return up to 24.6%. After a record year of M&A in 2015, deal-making fell sharply in the first half of 2016 as
stock market volatility contributed to a record for the dollar volume of failed bids. Preliminary reports from the Cambridge Associates Private Equity Index show PE funds returning
0.3% for the first quarter. While performance has varied across regions and strategies, it has been a very difficult year for hedge fund strategies. The HFRI Fund of Funds
Composite Index was up 0.8% for the quarter.

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