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The Markets

The second quarter provided a bumpy ride for investors.  Following the upheaval caused by the Brexit vote in June, July kicked off the third quarter by ending the month in favorable fashion, as each of the indexes listed here posted month-to-month gains, led by the Russell 2000 (5.90%) and the Nasdaq (6.60%).  Stocks held their own for July, despite falling energy shares, as crude oil prices (WTI) sank from around $49 per barrel to under $42 by the close of July.  As money moved into equities, bond yields remained on the low side as the yield on 10-year Treasuries remained below 1.60%, closing July at just about where it started at 1.45%.
 
The dog days of summer saw light trading in August, but that didn't stop the markets from moving sharply.  By the middle of the month, the Dow, S&P 500, and Nasdaq had surged to all-time highs -- the first time since 1999 that all three indexes reached a new high at the same time.  Yet by the end of August, each of the indexes listed here saw their values fall back to about where they were at the beginning of the month.  The large-cap Dow and S&P 500 fell ever so slightly from July's closing values, while the Russell 2000 and Global Dow posted modest gains for the month.  Crude oil fell below $40 per barrell during the month, but rebounded to close the month at about $45 per barrel.  Bond prices fell as the yield on 10-year Treasuries reached 1.60%.
 
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Market Month September

Indiana Trust & Investment Management Company
September 19, 2016
 

Back in July of 2014 the U.S. Securities and Exchange Commission (SEC) issued new rules for money market mutual funds. The rules establish new definitions for government funds and retail funds and require certain money market mutual funds, including institutional municipal money market funds, to price and transact at a “floating” or variable Net Asset Value. Under these new rules the institutional municipal money market funds may charge shareholders liquidity fees as well as provide for “redemption gates,” meaning a temporary halt on all withdrawals from the respective fund. The implications for these new rules are such that shareholders could now experience losses if the per-share value of the fund decreases below a lower limit threshold. A caveat to these new rules is that Government and U.S. Treasury money market mutual funds will not be subject to any of the new structural changes and thus will not be subject to fees, gates, or a floating Net Asset Value.

The implementation process for these rules has spanned several years and the final implementation date is set for October 14, 2016. Based upon how Indiana Trust Company utilizes money market funds within the broader structure of portfolio management, earlier this year we made an adjustment to the core money market position in taxable accounts by opting to replace the Northern Trust Municipal Money Market with the Northern Trust Government Select Money Market. Due to the fact that all U.S. Treasury and government money market funds are exempt from these structural reforms, we feel that this change is in the best interest of our clients.

If you have any questions about the aforementioned money market mutual fund reform or any other issues where we can assist then please do not hesitate to contact us. As always, we appreciate your business and the opportunity to help with your financial goals.

 

The Markets
 
Following an initial downturn largely in response to June's Brexit vote, equities rebounded during the month of July.  The first full week of the month saw each of the indexes listed here improve over the prior week, led by the Nasdaq, which gained almost 2.0%.  The Dow recouped just about all of the value lost right after the vote.  Long-term bond yields, highlighted by 10-year Treasuries, continued to slide -- falling 90 basis points from their year-end value.  By the week ended July 15, money flowed from long-term bonds (10-year Treasuries yield increased by 18 basis points) into equities as the Dow posted a 2.0% weekly gain, while the Russell 2000 jumped almost 2.4%.  Also helping boost stocks was a much-improved labor report, which saw the addition of almost 290,000 new jobs in June.  As the month wore on, light trading slowed the growth of the indexes listed here with the exception of the Nasdaq, which ended the week of the 22nd about 1.5% ahead of its value from the prior week.  As the month of July came to a close, each of the indexes listed here posted robust gains, led by the Nasdaq and the Russell 2000, each gaining about 6.0% over their June closing values.
 
Long-term bond yields fluctuated during the month, ultimately closing at essentially the same yield as June's closing return.  The price of gold (COMEX) increased by month's end, selling at $1,357.90 -- about $33 over June's end-of-month price of $1,324.90.
 
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The Markets

With no Federal Open Market Committee meeting and little news to jar the markets, the lazy, hazy days of August seemed to lull investors into a state of lethargy.  Trading was light and volatility, limited.  Despite the fact that several of the indexes tracked here posted new highs during the month, weekly changes shifted up and down within a narrow range.  The month's end saw mixed results, with large caps losing whatever momentum they had gained, while technology, small caps, and international stocks posted respectable monthly gains.

Long-term bond yields also showed limited movement over the month, ending 13 basis points higher than where they started.  The price of gold (COMEX) slumped, selling at $1,312.20 -- about $46 lower than July's closing price of $1,357.90.

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Market Month August

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.
 
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Brexit