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Quarterly Market Analysis and Commentary for Q3 2016

| November 01, 2016
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Developing a successful investment strategy requires constant monitoring of market trends. Read our quarterly market commentary and analysis for Q3 2016 to stay informed.

Considering the looming US presidential election, mixed economic data, and the constant concern about Fed policy decisions, one might have expected rather volatile and uninspired equity performance this quarter.

On the contrary, the US stock market was up 4.06% in Q3 2016, according to the MSCI USA index,[1] and most other major US indices are at or near all-time highs. Furthermore, volatility was largely subdued, highlighted by the fact that the S&P 500 went on a stretch of 43 straight trading days without a 1% move in either direction this quarter[2].

The MSCI ACWI, a measure of the global stock market, was up 5.43% in Q3 2016. International developed markets performed well with a 6.37% increase according to the MSCI World ex USA index, bringing the YTD return to 3.62%. Emerging markets continued their impressive performance with a 9.15% Q3 performance according to the MSCI Emerging Market Index, bringing their YTD Return to 16.36%1.

Emerging Markets Could Be Trending Up

After several years of poor performance, investors who allocated to emerging markets are being rewarded this year. Considering the attractive valuations of these markets, it’s possible this trend has legs.

On the fixed income side of things, markets were slightly positive for the quarter with the Barclays US Aggregate Bond index, and the Barclays Global Aggregate ex-US Hedged, up .46% and .53% respectively in Q3 2016. Their year-to-date performance has been admirable, though, at 5.80% and 6.89%, respectively1.

Looking at US factor performance for this stock market update, we saw small and quality perform particularly well in the third quarter, based on MSCI indexes, with the MSCI USA Small Cap up 6.82%, and the MSCI USA Quality up 5.37%.

Momentum and value have been slight detractors for the quarter based on the MSCI USA Momentum and MSCI USA Value indices1. Of course, it should be noted that factor performance is highly dependent upon the metrics used to define them, with different indexes and fund families delivering very different performance for what is ostensibly the same factor.


The US Federal Reserve Decides on Interest Rates

In the September meeting, Fed officials decided to leave short-term interest rates unchanged, citing the desire to “wait for further evidence of continued progress toward its objectives.”[3]

The Fed’s forecast for long run economic growth was adjusted downward from 2% to 1.8%, and the forecast for long run interest rates were also adjusted downward from 3% to 2.9%[4].

Despite this, the Fed Reserve’s outlook for the economy was generally positive, and they seemingly remain committed to their path of a gradual rise in interest rates. Many are now eyeing the December Fed meeting, as 74% of economists surveyed by the Wall Street Journal expect the next interest rate hike to come in that month.[5]


The Bank of Japan Strategy to Control Long-term Rates

On the same day the Federal Reserve announced their policy decision, the Bank of Japan (“BOJ”) also took an interesting policy stance.

They announced on September 21st their intentions to buy as many 10-year government bonds as necessary to keep their yield close to zero. The goal in doing this is to create a spread between short-term yields and long-term yields which should help Japanese banks, pension funds, and life-insurance companies.[6]

While we frequently see central banks set short-term rates, it is rather unconventional for central banks to try and control longer-term rates. This is the Bank of Japan’s first attempt to control long-term rate in its history. This unorthodox policy move speaks to the extreme difficulty they’ve had in spurring on growth and inflation.[7]  

It will be interesting to see how these central bankers’ policy decisions play out. On one hand, you have the Federal Reserve signaling tighter U.S. policy through rate hikes, while BOJ looks to further monetary easing with a desire to overshoot its 2% inflation target. As of this writing, US and Japanese markets have responded positively to both initiatives.


The Potential Impact of the 2016 Presidential Election on the Market

Many investors’ attentions are focused on how the election results will potentially affect the stock markets and their portfolios. While there are a plethora of studies on this topic, it is difficult to ascertain clear relationships. Blackrock Chief Investment Strategist Russ Koesterich states that “Historically, whether a Republican or Democrat occupies the White House has had no statistically significant impact on U.S. equity markets.”[8]

Research by Schwab Center for Financial Research indicates that the first year of the presidential term has historically been the weakest year for stocks[9]. Other research examines questions such as which sectors perform best during election years? Does the stock market perform better under a Democratic or Republican President?

The data may be interesting to look at, but it rarely lends itself to any actionable insights for investors. For one, data based on past elections may not be particularly meaningful for this one. Furthermore, just as important as whom the next president is, are the numerous factors outside a president’s control such as monetary policy, demographics, economic cycles, etc.

While it’s entirely possible that we see could a pickup in volatility due to the election, our investment strategy remains focused on long-term fundamentals for stock investment strategy.


Stay Informed on Market Changes & Invest Wisely with Kemper

When it comes to reviewing quarterly market analysis reports, we continue to encourage investors to focus on the long-run and on what they can control, such as having a well-diversified portfolio that’s suitable for their risk profile.   

For help developing an investment strategy that can weather market volatility by focusing on a long-term fundamental investing philosophy, reach out to our team of experienced investment consultants at Kemper Capital Management LLC.


Symmetry Partners, LLC, is an investment advisory firm registered with the Securities and Exchange Commission. All data is from sources believed to be reliable but cannot be guaranteed or warranted. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, product or any non-investment related content made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions.

Diversification seeks to improve performance by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market. Past performance does not guarantee future results.

Index Disclosure and Definitions

Investors cannot invest directly in an index. Indexes have no fees. Historical performance results for investment indexes do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the occurrence of which would have the effect of decreasing historical performance results. Actual performance for client accounts will differ from index performance.

S&P 500 Index represents the 500 leading U.S. companies, approximately 80% of the total U.S. market capitalization.

Barclays Global Aggregate ex-USD Index (USD Hedged) is designed to measure the universe of global non-U.S. dollar-denominated government, government agency, corporate, and securitized investment-grade fixed-income investments.

Barclays U.S. Aggregate Bond Index: The US Aggregate Bond Index is a broad-based benchmark that measures the investment grade, US dollar-denominated, fixed rate taxable bond market including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS.

MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets (as defined by MSCI). The index consists of the 25 emerging market country indexes.

MSCI ACWI (All Country World Index) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.

MSCI USA Momentum Index is based on MSCI USA Index, its parent index, which captures large and mid cap stocks of the US market. It is designed to reflect the performance of an equity momentum strategy by emphasizing stocks with high price momentum, while maintaining reasonably high trading liquidity, investment capacity and moderate index turnover.

The MSCI USA Quality Index is based on the MSCI USA Index, its parent index, which includes large and mid cap stocks in the US equity market. The index aims to capture the performance of quality growth stocks by identifying stocks with high quality scores based on three main fundamental variables: high return on equity (ROE), stable year-over-year earnings growth and low financial leverage. The MSCI Quality Indexes complement existing MSCI Factor Indexes and can provide an effective diversification role in a portfolio of factor strategies.

MSCI USA Value Index captures large and mid cap US securities exhibiting overall value style characteristics.  Value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to prive and dividend yield.

MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market.

MSCI USA Small Cap Index measures the performance of the small cap segment of the US equity market. 

MSCI World ex USA Index captures large and mid cap representation across 22 of 23 developed market countries – excluding the United States

© Morningstar 2016. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results



[1] All returns are according to Morningstar as of September 30, 2016.

[2] WSJ Staff. “Selloff Replicating Unusual Pattern Not Seen in More Than 50 Years”. Wall Street Journal. September 13, 2016

[3] Federal Reserve Press Release, (accessed 9/21/2016)

[4] Federal Reserve Board and Federal Open Market Committee release economic projections from the September 20-21 FOMC meeting, (accessed 09/21/2016)

[5] Harrison, David & Hislenrath, John. "Feds Stand Pat, but Says Case for Rate Increase Has Strengthened”. The Wall Street Journal. September 21, 2016.

[6] Nakamichi, Takashi and Rosenthal, Rachel. “Bank of Japan Sets Bond-Rate Target in Policy Revamp”. The Wall Street Journal. September 21, 2016.

[7] Ibid.

[8] Koesterich, Russ. “The (expected) market impact of the 2016 election”. (accessed September 21, 2016)

9 “How Do Stocks Perform During the Presidential Election Cycle?”. (accessed September 21, 2016)

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