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The U.K. voted to leave the European Union last week in a referendum referred to as "Brexit," triggering a seismic event across global currency, stock, and bond markets.  The British pound has fallen over 10% to a 30 year low versus the dollar and stock markets around the world have dropped.  No doubt these initial days after the historic vote represent the first of several volatile upcoming trading sessions across capital markets.
Although direct exposure to the U.K.'s stock market represents under 5% of ITC's allocations to stocks, the reverberations of the U.K.'s decision will continue to be felt across all equity markets.  The diversification built into ITC client portfolios guards against concentrations in the hardest hit stock markets in western Europe and the sectors hurt the worst so far, namely global banks.  In portfolios with fixed income allocations, we utilize foreign bonds.  When constructing those allocations, we chose a currency-hedged approach to guard against the type of currency volatility we are witnessing now, so there is no exposure to the pound in our bond allocations.
Most importantly, this vote may exert only a marginal effect on global economic fundamentals, which remain stable but weak.  We still live in a slow-growth, low-inflation, low-interest rate environment, characterized by sluggish productivity and investment.  Also, it is important to remember that the U.K. never adopted the euro as its currency.  Britain maintained a fully functional central bank and control of its own monetary policy throughout its membership of the E.U.  The full impact of the "Brexit" will not be known for some time, and it is this uncertainty which is roiling markets.
"Brexit" has been a risk stalking markets in a similar way that plummeting oil prices, the strong dollar, and concerns about China created short-lived volatility back in August 2015 and in January and February this year.  For that reason, we again stress the importance of looking through the noise to focus on fundamentals such as corporate earnings and stock market valuation metrics.  The market reaction to the "Brexit" may provide windows for rebalancing in global equities once the worst of the initial volatility has passed.  As always, we will be watching portfolios to take advantage of performance divergence across asset classes.  From this perspective, the market's initial response is likely to create opportunity for patient, long-term investors with cool heads.
We are here for any questions or thoughts over the coming weeks.
Click on the link below to read more about Brexit



The Markets (as of market close May 31, 2016)

Following an up-and-down path similar to what occurred in April, the indexes listed here ultimately closed the month of May higher (except for the Global Dow).  The month started with a run of positive returns, only to see much of the month's gains given back by the end of May.  Information from the Fed that interest rates could be raised as early as June could be interpreted as both a positive (improving economy) and a negative (higher lending rates), which seemed to flummox investors a bit.  Several economic indicators picked up the pace in May as employment remained steady, the housing market gained  some momentum heading into the summer months, and consumer prices increased along with mounting oil prices.

Long-term bond yields fluctuated during the month, ultimately closing at essentially the same yield as April's closing return.  The price of gold (COMEX) decreased by month's end, selling at $1,217.50 -- about $77 below April's end-of-month price of $1,294.90.

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The month in review


spangler01Archie culminates a career in banking and trust financial services that spans more than 46 years including 13+ years with Indiana Trust Company in Muncie,  Indiana.  A number of local civic organizations and fundraising campaigns have benefited from Archie's involvement over the years.  He completed 25 years on the Board of Directors of the Muncie Boys & Girls Club, serving a term as President.  He continues to be active in his church and serves on the Board as Stewardship Chairman for the Yorktown Church of the Nazarene.

The Markets (as of market close April 29, 2016)

Despite a poor close to the month, the indexes listed here improved in April (with the exception of the Nasdaq) compared to their March closing values -- but not by much.  The DOW gained a scant 88.55 points over the month, while the S&P 500 increased less than 0.3%.  On the year, only the Russell 2000 and the Nasdaq remain below their year-end values.

Bond yields increased by the close of trading for April as prices fell, presumably due to investor money moving back to equities.  The price of gold (COMEX) increased by month's end, selling at $1,294.90 -- about $62 higher than March's end-of-month price of $1,233.00

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The Month in Review


The Markets

The first quarter of 2016 started with a whimper as equities suffered several weeks of losses.  However, as March came to a close, several of the indexes listed here recovered enough to finish the quarter in positive territory.  The DOW picked up 260 points to close 1.49% ahead of its fourth-quarter closing value.  The S&P 500 also finished the first quarter slightly better than it ended the previous quarter.  However, the NASDAQ, Russell 2000, and the Global Dow each ended the quarter behind their respective December 2015 closing values.  March proved to be a good month for equities, as each of the indexes listed here yielded positive returns, led by the DOW and the Russell 2000, each of which gained more than 7.0% over February.

The debt side of the ledger also produced a mixed bag of revolving returns as 10-year Treasury yields fell to their lowest end-of-quarter levels since the fourth quarter of 2012.  Yields on long-term Treasuries opened the quarter at around 2.25%, but ended it at 1.79% as money moved in, driving prices higher and yields lower

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Market Review