Stocks completed a near 6% round trip in a rousing final week of the second quarter, leaving most of the broad equity averages at slightly positive levels for the three months.  The U.K. vote to leave the European Union clearly caught investors leaning the wrong way, triggering panic across global markets.  The abrupt recovery that followed was almost equally surprising.

Something for Everyone:

Stocks declined over 10% in the quarter.  They also gained more than 10%.  Oil dropped 30% and gained almost 50% in the quarter.  The Fed advised to expect four more rate hikes this year and then took that off the table.  China both devalued its currency and strengthened its currency in the quarter.  In the end, the broad stock market eked out a small gain, leaving investors relieved, notwithstanding symptoms of whiplash.

This has clearly been a difficult start to the year, as volatility has picked up meaningfully from an extended period of relatively calm markets. For many of us, the equity market meltdowns of 2000-2002 and 2008-2009 are fresh in our memories, and it is natural to be frightened and emotional about the possibility of another similar circumstance unfolding now. Count us among those who are not anxious to go through those markets again.

The unusually tight trading range that defined the stock market in the first half of the year gave way to the downside in the third quarter. Slowing global growth became a flashpoint of concern midway through the quarter, triggered by disappointing economic data out of China, the continued erosion in oil prices and an untimely Fed decision to defer on imminent rate hikes.

In contrast to strongly positive returns during the past twelve months for the Meritage Value and Growth Equity strategies, the Yield-Focus strategy has experienced a tough year. Yield equity strategies in general, and our differentiated Yield-Focus strategy specifically, reached a very strong multi-year relative performance peak approximately one year ago. Simply stated, the basic reason for the divergence over the past year relates to the available market opportunities for each specific strategy.

Beware Greeks Bearing Gifts (or Referendums)

A relatively quiet quarter for stocks was interrupted at quarter-end as the charade of negotiations around Greece’s solvency had an untimely reality check. Modest equity gains that had accumulated over the quarter were given back in the process, leaving equity returns flat to slightly lower for the three months. Prior to this hiccup, two earlier sources of volatility, falling oil prices and a rising dollar, had moderated in the second quarter, creating a more stable backdrop.

Going Nowhere, Fast Broad stock returns were relatively unchanged for the quarter, a fitting outcome for a market that moved frequently with conviction in both directions. It is also not surprising to see a consolidation of the very strong returns in the prior quarter. Much of the...


In the Books

A strong fourth quarter lifted U.S. stocks to record highs, generating the third consecutive year of double-digit returns. A familiar combination of solid corporate earnings, Federal Reserve stimulus and few attractive alternatives once again provided a good environment for stocks. Stocks also received support from the strongest back-to-back quarters of economic growth since the recovery began almost six years ago.

Coming off a strong second quarter, stocks turned in a mixed performance for the three months ending September 30. The fundamental backdrop for stocks remained relatively stable, with interest rates drifting slightly lower and generally supportive news flow around corporate earnings, economic growth, inflation and Fed policy. While this familiar combination of factors has been hospitable for stocks, this past quarter reflected a growing unease about the prospects of further upside.