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PGAM Market Commentary for 2Q16

Global equity markets turned in a mixed performance during the second quarter of 2016. Global stock prices had been gaining prior to the referendum in the United Kingdom on whether to stay or leave the European Union. The vote to leave was surprising to equity markets and caused a pullback in stock prices across the globe. The weakness in European stock markets was sufficient to more than reverse gains in non-US developed markets as measured by the MSCI EAFE Index. An easing of concerns has resulted in global stock market gains in the weeks following June 30, 2016.

For the first six months of 2016, the U.S. stock market as measured by the Standard and Poors 500 Index showed a total return of 3.8%. The MSCI EAFE Index declined by 4.4% while the total return on the MSCI Emerging Markets Index was 6.4%. Global equities as measured by the MSCI All Country World Index showed a total return of 1.2% for the first six months of 2016. For the second quarter of 2016, the return on the Standard and Poors 500 Index was 2.5% while the MSCI EAFE Index declined by 1.5% and the MSCI Emerging Markets Index returned 0.7%. The second quarter return on the MSCI All Country
World Index was 1.0%.

In recent weeks, the global economic outlook appears to have brightened and this improvement in sentiment has provided the catalyst for the rally in global equity prices. In the UK, the surprise June 23 vote in favor of leaving the EU created considerable uncertainty for the UK and European economies. However, a new prime minister, Theresa May, has already taken office in contrast to earlier expectations that the change would not happen until September or October. While the final outcome of the UK leaving the EU will still take several years to complete at least the process can begin sooner than anticipated previously. In the meantime, monetary policy in Europe and the U.K will remain extremely accommodative in order to mitigate the negative impact of the Brexit vote on the economies of the EU and UK.

In the U.S., the upcoming Presidential election creates uncertainty. However, a strong payroll employment report for June eased concerns that the U.S. economy was weakening. It now looks like U.S. economic growth after inflation as measured by the Gross Domestic Product will continue at a 2% pace for the foreseeable future. At the same time the Federal Reserve seems inclined to delay further increases in short term interest rates in order to assure continued economic growth.

Elsewhere, China reported that their inflation adjusted GDP grew at a better than expected rate of 6.7% during the second quarter, fueled by credit growth. Concerns that the Chinese economy was faltering should ease, leading to a more optimistic view of the global economy. Prospects for Japan have also improved. The Liberal Democratic Party has increased its majority in the Upper House to over two thirds, improving the prospects for the Abe government to finally move ahead with corporate reform. The improvement in economic prospects for China, Japan, and the U.S. should have a positive impact on emerging economies and their respective equity markets. These more favorable economic outlooks reinforce the opinion we expressed in our previous commentary that lows have been seen in commodity prices, including oil.

In our global equity portfolios we have increased our commitment to gold. Monetary policy worldwide has been extremely accommodative and this is likely to lead to higher inflation down the road. Gold should be a beneficiary of this trend. Our policy with the rest of our cash position is to continue our approach of gradually committing reserves to equities as specific attractive opportunities present themselves.

As of July 15, 2016 our equity asset allocation is as follows:
North America (Including U.S.) 60%
Developed Markets (Including Europe and Japan 28%
Emerging Markets 7%
Gold 5%

The concerns over weaker global economic growth, particularly after the June 23 Brexit vote, caused global interest rates to extend their decline through the end of the second quarter. Yields on two year U.S. Treasuries declined from 0.7% to 0.6% during the second quarter. Five year Treasury yields declined from 1.2% to 1.0% while ten year yields declined from 1.8% to 1.5%. German ten year yields declined from 0.2% to a negative 0.5% while Japanese ten year yields actually rose slightly, from a negative 0.3% to a negative 0.2%.

With global and U.S. economic prospects appearing more positive, we continue to believe in the inevitability of a rise in U.S. interest rates. In remains likely that the Federal Reserve will allow inflation to rise beyond the stated target of 2% given their desire to promote an acceleration of wage gains in the U.S. Given this expectation, the maturity of our taxable and tax exempt fixed income portfolios remains shorter than average. We continue to be selective in the establishment of new positions and our focus remains on securities which appear to offer superior risk/return characteristics.

Important Disclosures:
This report is for informational purposes only, and contains data based on information derived from sources Princeton Global Asset Management (PGAM) believed to be accurate. However, PGAM cannot assure the accuracy of the data. Past performance is not a guarantee of future results. Portfolio holdings and characteristics are subject to change. The information in this report should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the securities transactions or holdings that may be cited were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities cited.

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