• Investing & Markets

Market Recap – UK Court Rules Brexit Needs Approval

November 4, 2016 | Brendan Erne, CFA

Market Digest – Week Ending 11/04/16

Global stocks trended down for the week as anxiety surrounding the US Presidential election weighed on returns. It also appears increasingly likely the Fed will increase rates in their December meeting as inflation firms. Investors sought safety in gold and bonds, which both ended the week higher than they began. The euro and pound strengthened against the US dollar as a UK High Court ruled Brexit cannot proceed without a vote from Parliament.

Weekly Returns:

S&P 500: 2,085 (-1.9%)
FTSE All-World ex-US: (-2.1%)
US 10 Year Treasury Yield: 1.77% (-0.09%)
Gold: $1,305 (+2.3%)
USD/EUR: $1.114 (+1.4%)

Major Events:

• Monday – CenturyLink agreed to buy Level 3 Communications for roughly $25 billion in a cash and stock deal.
• Monday – Consumer spending rose 0.5% in the month of September, ahead of consensus estimates.
• Wednesday – The US Federal Reserve left interest rates unchanged, but indicated a December hike is possible due to firming inflation.
• Wednesday – After a 108 year drought, the Chicago Cubs won the World Series in a thrilling game 7 victory.
• Thursday – A UK High Court ruled the country cannot start the process of leaving the EU without first obtaining approval from Parliament, which could ultimately delay or soften the impact of Brexit.
• Friday – US nonfarm payrolls increased 161,000 in October, pushing the unemployment rate down to 4.9%. Wage growth also accelerated.

Our take:

Change is coming, and we mean more than just the upcoming presidential elections. We’re referring to change within the financial industry. The US Department of Labor earlier this year issued its fiduciary rules, designed to reduce conflicts of interest between brokers and investors. More specifically, it requires brokers to act in their clients’ best interest (as a “fiduciary”) when dealing with investments in retirement accounts. The rule isn’t set to take effect until April of next year, but it’s already having an impact.

In a note on Tuesday, Bank of America Merrill Lynch told its 14,000+ brokers/advisors to immediately stop selling mutual funds that charge commissions in retirement accounts. This follows a move in October to eliminate retirement accounts where investors are charged transaction fees. Both of these changes are significant, and we fully expect others to follow suit over time.

As we’ve said many times before, fees are one of the biggest killers of long-term returns. The good news is that Merrill’s decision is part of wider trend of falling fees. According to a study by the Investment Company Institute and Lipper, the average equity mutual fund expense ratio has fallen from 1.60% in 2000 to 1.31% in 2015. That’s still high, but it’s moving in the right direction. Part of this is due to competition, part is due to heightened scrutiny on fees, but another part is due to investors migrating towards lower cost passive index funds. According to the same study, passive index mutual fund assets have grown from $327 billion in 2002 to more than $2.2 trillion in 2015. The reason is obvious. Why pay outsized fees for actively managed funds if the majority don’t outperform their benchmarks? Clearly, investors are getting smarter.

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