Markets in perspective – September 2016 in review – Wrapping up a strong 3Q16 on balance

Capital Markets Returns September 2016

Sources: U.S. Equity: Russell 3000® Index, Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index, Emerging Markets: Russell Emerging Markets Index, U.S. Bonds: Barclays U.S. Aggregate Bond Index, Global REITs: FTSE EPRA/NAREIT Developed Real Estate Index, Commodities: Bloomberg Commodity Index, Balanced: 30% U.S. Equity, 20% Non-U.S. Equity, 5% EM, 35% Bonds, 5% REITs, 5% Commodities

After a quiet month of August, volatility quickly returned to the markets in early September when the S&P 500® Index had its largest one-day pull back since the Brexit vote in June. As September wore on, calm essentially was restored and most markets were able to recoup their losses from the start of the month. All major equity indexes and most asset classes were still able to post positive returns for the month and by September 30, all asset classes were back in positive territory on a year-to-date basis, having shaken off the remnants of the volatile start to the year.

Equities

For September, U.S. large cap (Russell 1000® Index) stocks finished up slightly with a return of .08%. U.S. small cap stocks (Russell 2000® Index) and international developed (Russell Developed ex-U.S. Large Cap Index NR) fared much better and outperformed U.S. large cap by more than 100 basis points. The best equity performer for the month was once again emerging markets (Russell Emerging Markets Index NR), thereby continuing the recovery streak it’s been on for most of 2016. Emerging market stocks also continue to be the top equity performer for the year to date, posting returns of over 15%.

Real assets

It was another solid month for real assets as commodities (Bloomberg Commodity Index) was the best performing asset class in September, with a return of 3.1%. This was in part due to a strong rally in the price of oil at the end of the month following OPEC’s announcement that they plan to cut production for the first time in 8 years. After the announcement, the price of Brent Crude rose from under $45 per barrel to over $48 within a few days.

Fixed income & interest-rate sensitive asset classes

The only detractors for the month came from interest rate sensitive asset classes, such as core fixed income (Barclays U.S. Aggregate Bond Index) and real estate (FTSE EPRA/NAREIT Developed Index) as the U.S. 10-year Treasury yield rose from 1.58% to 1.60% between the end of August and the end of September. Despite the rise in interest rates, global high yield (BofAML Global High Yield TR Hdg) and emerging markets bonds (Barclays EM USD Aggregate TR) continued their surge this year and are now up 14.3% and 12.8%, respectively, for the year to date.

Asset Class Dashboard – September 2016

For the fourth month in a row, nearly all asset classes tracked in the Asset Class Dashboard had a 12-month return within their historical typical range. Cash continued to fall below its 12-month historical typical range and Emerging Market Debt nudged just above its 12-month historical typical range. Additionally, nearly all asset classes (with the exception of U.S. bonds) improved their 12-month return. This means that not only did 13 out of 14 asset classes post positive returns for the past 12 months, but 10 of them also posted double digit 12-month returns.

Asset Class Dashboard September 2016

Source: Large cap U.S. equity: Russell 1000® Index, Large cap Defensive U.S. equity: Russell 1000 Defensive Index, Large cap dynamic U.S. equity: Russell 1000 Dynamic Index, Small cap U.S. equity: Russell 2000 Index, Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index, Global equity: Russell Developed Large Cap Index, Emerging markets: Russell Emerging Markets Index, Commodities: Bloomberg Commodity Index, Global infrastructure: S&P Global Infrastructure Index, Global real estate: FTSE EPRA/NAREIT Developed Index, Cash: Citigroup 3-Month U.S. Treasury Bill Index, Global high yield bonds: Bank of America Merrill Lynch (BofAML) Global High Yield Index, Emerging markets debt: JP Morgan Emerging Markets Bond Index Plus, U.S. bonds: Barclays U.S. Aggregate Bond Index.

How do I read this chart?

This dashboard is intended as a tool to set context and perspective when evaluating the current state of a sample of asset classes.

The ranges of 12 month returns for each asset class are calculated from its underlying monthly index returns. The stated inception date is the first full month of an index’s history available for the dashboard calculation.

Here is how to read the graphic on this page:

FOR EACH INDICATOR, THE HORIZONTAL BAR SHOWS FOUR THINGS

A GRAY BAR shows the full range of historical rolling 12-month returns for a sample of asset classes.

A BLUE COLOR BAND represents the typical range (one standard deviation away from the mean, i.e. 68% of historical observations) of rolling 12-month returns for these asset classes.

AN ORANGE MARKER represents the most recent 12-month return of the asset classes.

The bottom line

Diversification helped a hypothetical index portfolio in September. Although traditional asset classes such as U.S. large cap stocks and core fixed income were essentially flat, emerging markets equities, global high yield fixed income and commodities helped to produce positive returns for a hypothetical diversified index portfolio. An investor in a hypothetical balanced index portfolio would have returned 0.5% for the month, bringing the year to date return for such a portfolio to 6.8%. As we enter the 4th quarter of 2016, a lot of uncertainty still remains regarding corporate earnings, interest rates and the U.S. election cycle. However maintaining a diversified approach to investing may offer the highest chance of success even though diversification doesn’t protect against all loss or guarantee a profit.

Disclosures:Standard Deviation is a statistical measure that reflects the degree to which an individual value in distribution tends to vary from the mean of the distribution. Standard Deviation is a useful tool in measuring the historical typical range as 1 Standard Deviation includes approximately 68% of the historical values in a normal distribution. Using this measurement allows us to exclude the more extreme values which would not be as probable to see from the indicator.

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

This material is not an offer, solicitation or recommendation to purchase any security.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.

The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

Bond investors should carefully consider risks such as interest rate, credit, default and duration risks. Greater risk, such as increased volatility, limited liquidity, prepayment, non-payment and increased default risk, is inherent in portfolios that invest in high yield (“junk”) bonds or mortgage-backed securities, especially mortgage-backed securities with exposure to sub-prime mortgages. Generally, when interest rates rise, prices of fixed income securities fall. Interest rates in the United States are at, or near, historic lows, which may increase exposure to risks associated with rising rates. Investment in non-U.S. and emerging market securities is subject to the risk of currency fluctuations and to economic and political risks associated with such foreign countries.

In general, alternative investments involve a high degree of risk, including potential loss of principal; can be highly illiquid and can charge higher fees than other investments. Hedge strategies and private equity investments are not subject to the same regulatory requirements as registered investment products. Hedge strategies often engage in leveraging and other speculative investment practices that may increase the risk of investment loss.

Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and to political systems, which can be expected to have less stability than those of more developed countries. Securities may be less liquid and more volatile than US and longer-established non-US markets.

Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

S&P500® Index: The S&P 500® Index is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500® Index is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.

Russell Emerging Markets Index: Measures the performance of the investable securities in emerging countries globally. Constructed to provide a comprehensive and unbiased barometer for this market segment and is completely reconstituted annually to accurately reflect the changes in the market over time.

Russell 1000® Index: Measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership.

Russell 2000® Index: measures the performance of 2000 issues representative of the U.S. small capitalization securities market.

Russell Midcap® Index: measures performance of the 800 smallest companies (31% of total capitalization) in the Russell 1000 Index, with weighted average market capitalization of approximately $6.7 billion, median capitalization of $3.6 billion, and market capitalization of the largest company $13.7 billion.

Russell 1000® Defensive Index: Subset of top 1000 U.S. equities with companies that demonstrate less than average exposure to certain risk.  (lower stock price volatility, higher quality balance sheets, stronger earnings profile).

Russell 1000® Dynamic Index: Subset of top 1000 U.S. equities with companies that demonstrate than average exposure to certain risks.  (higher stock price volatility, lower quality balance sheets, uneven earnings profile).

Russell Developed ex-U.S. Large Cap Index: Offers investors access to the large-cap segment of the developed equity universe, excluding companies assigned to the U.S. Constructed to provide a comprehensive and unbiased barometer for this market segment and is completely reconstituted annually to accurately reflect the changes in the market over time.

Russell Developed Large Cap Index: Offers investors access to the large-cap segment of the developed equity universe. Constructed to provide a comprehensive and unbiased barometer for the large-cap segment of this market and is completely reconstituted annually to accurately reflect the changes in the market over time.

Barclays U.S. Aggregate Bond Index: An index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities, and mortgage-backed securities. (specifically: Barclays Government/Corporate Bond Index, the Asset-Backed Securities Index, and the Mortgage-Backed Securities Index).

BofA Merrill Lynch Global High Yield Index: Tracks the performance of USD, CAD, GBP and EUR denominated below investment grade corporate debt publicly issued in the major domestic or Eurobond markets.

Bloomberg Barclays Emerging Market USD Aggregate Bond Index: includes fixed and floating-rate U.S> dollar-denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers. Country eligibility and classification as Emerging Markets is rules-based and reviewed annually using World Bank income group and International Monetary Fund (IMF) country classifications.

FTSE EPRA/NAREIT Developed Index: A global market capitalization weighted index composed of listed real estate securities in the North American, European and Asian real estate markets.

S&P Global Infrastructure Index: provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe. The index has balanced weights across three distinct infrastructure clusters: utilities, transportation and energy.

Citigroup 3-Month U.S. Treasury Bill Index: measures monthly return equivalents of yield averages that are not marked to market. It consists of the last three three-month Treasury Bill month-end rates. Returns for this index are calculated monthly since January 1978 and daily since October 2009. © 2016 Citigroup Index LLC. All rights reserved.

JPM Emerging Market Bond Index (EMBI): dollar-denominated sovereign bonds issued by a selection of emerging market countries.

Bloomberg Commodity Index Total Return: Composed of futures contracts on physical commodities. Unlike equities, which typically entitle the holder to a continuing stake in a corporation, commodity futures contracts normally specify a certain date for the delivery of the underlying physical commodity. In order to avoid the delivery process and maintain a long futures position, nearby contracts must be sold and contracts that have not yet reached the delivery period must be purchased. This process is known as “rolling” a futures position.

The S&P Global Infrastructure Index: Provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe. To create diversified exposure across the global listed infrastructure market, the index has balanced weights across three distinct infrastructure clusters: Utilities, Transportation, and Energy.

The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

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Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the “FTSE RUSSELL” brand.

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