In spite of mostly lackluster economic results around the world, financial assets posted another solid performance in the third quarter of 2016. Once the surprising vote in late June by the UK to leave the European Union was digested, the markets settled into a relatively quiet drift upward that ended in mid-September.
That calm ended dramatically as investors began to question the assumptions around the path for higher interest rates in the US. With several Fed governors arguing for another hike in September after the solid August jobs report, both stock and bond markets reacted negatively until Chair Janet Yellen allayed market fears about a faster pace of tightening.
At this point, odds remain high of another December hike (following last December’s bump), but the longer-term outlook for higher rates remains subdued. If rates continue to remain at low levels and/or the rise is gradual and predictable, the backdrop for financial assets should remain favorable.
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