The dust of a volatile quarter has cleared. The equity market exhibited a higher correlation to oil prices over the quarter than it has historically: oil price movements drove large cap stocks lower early in the year, to -10.3% YTD at the lowest point, and subsequently helped them rebound and finish the quarter up 1.3%. Price appreciation in oil and metals pushed the commodities index up 0.4%, and emerging market equities also moved higher, helped by stronger commodity prices, lower expectations for U.S. rate increases and a fall in the U.S. dollar. Further rate cuts in Europe and Japan did not boost developed market equities, which fell 2.9%. However, very low global interest rates, in combination with an extremely dovish Federal Reserve, caused spread compression and lower base rates over the quarter, leading to positive returns from U.S. fixed income. Finally, some investors dialed down equity risk in response to the U.S. recession scare, leading small cap stocks to fall 1.5%. While in our view the chance of recession over the next year is low, we continue to recommend a diversified portfolio of assets as the best way of weathering market volatility while achieving long-term investment goals.
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