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Economic Outlook

The Helmstar Group is a Registered Investment Advisory Firm

GDP Growth and Equity ReturnsMany investors look to gross domestic product (GDP) as an indicator of future equity returns

According to the advance GDP estimate released by the Bureau of Economic Analysis

(BEA) on April 28, annualized real US GDP growth was 0.5% in the first quarter of

2016—below the historical average of 3.2%.1 This might prompt some investors to ask

whether below-average quarterly GDP growth has implications for their portfolios.

Market participants continually update their expectations about the future, including

expectations about the future state of the economy. The current prices of the stocks

and bonds held by investors therefore contain up-to-date information about expected

GDP growth and a multitude of other considerations that inform aggregate market

expectations. Accordingly, only new information that is not already incorporated in

market prices should impact stock and bond returns.

Quarterly GDP estimates are released with a one-month lag and are frequently revised

at a later point in time. Initial quarterly GDP estimates were revised for 54 of the 56

quarters from 2002 to 2015.2 Thus, the final estimate for last quarter may end up being

higher or lower than 0.5%.

Prices already reflect expected GDP growth prior to the official release of quarterly

GDP estimates. The unexpected component (positive or negative) of a GDP growth

estimate is quickly incorporated into prices when a new estimate is released. A relevant

question for investors is whether a period of low quarterly GDP growth has information

about short-term stock returns going forward.

3.0%

3.2%

All quarters Three months followingbottom quartile

quarterly GDP growth

Quarterly S&P 500 Index Returns, 1948–2016

From 1948 to 2016, the average quarterly return for the

S&P 500 Index was 3%. When quarterly GDP growth was in the

lowest quartile of historical observations, the average S&P 500

return in the subsequent quarter was 3.2%, which is similar to the

historical average for all quarters. This data suggests there is little

evidence that low quarterly GDP growth is associated with short-

term stock returns above or below returns in other periods.

Sources: S&P Dow Jones Indices, Bureau of Economic Analysis.

Past performance is not a guarantee of future results. Indices are not available for direct

investment; therefore, their performance does not reflect the expenses associated with the

management of an actual portfolio.

1. Source: Bureau of Economic Analysis.

2. 2002 to 2015 is the longest time period for which BEA provides data comparing initial to final estimates. The average difference between an initial and final estimate was 1% in absolute magnitude over this time period.

Adapted from “GDP Growth and Equity Returns,” Issue Brief, May 2016. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

All expressions of opinion are subject to change. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.


Market SummarySecond Quarter 2016 Index Returns

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment

(index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global

REIT Index), US Bond Market (Barclays US Aggregate Bond Index), and Global Bond ex US Market (Citigroup WGBI ex USA 1−30 Years [Hedged to USD]). The S&P data are provided by Standard & Poor's Index Services Group. Russell

data © Russell Investment Group 1995–2016, all rights reserved. MSCI data © MSCI 2016, all rights reserved. Barclays data provided by Barclays Bank PLC. Citigroup bond indices © 2016 by Citigroup.

US Stock

Market

International

Developed

Stocks

Emerging

Markets

Stocks

Global

Real

Estate

US Bond

Market

Global

Bond

Market

ex US

2Q 2016 STOCKS BONDS

2.63% -1.05% 0.66% 4.48% 2.21% 3.11%

Since Jan. 2001

Avg. Quarterly Return 1.7% 1.3% 2.9% 2.9% 1.3% 1.2%

Best 16.8% 25.9% 34.7% 32.3% 4.6% 5.5%Quarter Q2 2009 Q2 2009 Q2 2009 Q3 2009 Q3 2001 Q4 2008

Worst -22.8% -21.2% -27.6% -36.1% -2.4% -3.2%Quarter Q4 2008 Q4 2008 Q4 2008 Q4 2008 Q2 2004 Q2 2015


World Stock Market PerformanceMSCI All Country World Index with selected headlines from Q2 2016

Graph Source: MSCI ACWI Index. MSCI data © MSCI 2016, all rights reserved.

It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results.

These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news.

170

180

190

200

Apr May Jun

“Mortgage Refis

Return as

Interest Rates

Plummet”

“US Budget Deficit

Expands In First

Half of Fiscal Year”

“US Jobless Claims

Fall to Four-Decade

Low”

“Fed Signals

No Rush to

Raise Rates”

“Anemic

Wage Growth

Restraining Economy”

“Eurozone Economic

Recovery Gathers

Pace”

“Rising US Rents

Squeeze the

Middle Class”

“Greece Passes Austerity

Measures as Creditors

Remain Deadlocked over

Bailout Terms”

“US Treasury Yield

Curve Is Flattest

Since 2007”

“Eurozone Slides

Back into

Deflation”

“US Consumer

Spending Climbed at Fastest Pace

in Nearly Seven Years”

“Weak

Hiring

Pushes

Back Fed’s

Plans”

“Oil Prices’ Rebound Leaves

Investors Guessing What’s

Next”

“US Stocks Rise

to Cap Rocky

First Half”

“Brexit Vote

Pushes Britain

into Uncharted Waters”


World Stock Market PerformanceMSCI All Country World Index with selected headlines from Q2 2016

These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news.

Graph Source: MSCI ACWI Index. MSCI data © MSCI 2015, all rights reserved.

It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results.

140

160

180

200

Jun-2015 Sep-2015 Dec-2015 Mar-2016 Jun-2016

Long Term (2000–Q2 2016)

0.000

50.000

100.000

150.000

200.000

250.000

2000 2004 2008 2012 2016

Last 12

months

“Iran, World Powers

Reach Nuclear Deal”

“Oil Prices’ Rebound

Leaves Investors

Guessing What’s Next”

“Eurozone Slides

Back into Deflation”

“Weak Hiring

Pushes Back

Fed’s Plans”

“Rising US Rents

Squeeze the

Middle Class”

“US Jobless Claims

Fall to Four-Decade

Low”

“S&P 500 Turns

Positive for

the Year”

“Net Worth of US

Households Rose to

Record $86.8

Trillion in Fourth

Quarter”

“British Pound Sinks

to Seven-Year Low

on ‘Brexit’ Fears”

“Dow, S&P Off to the

Worst Starts Ever

for Any Year”

“European Markets to Finish

2015 among World’s Top

Performers”

“Paris Attacks Leave

More than 100 Dead”

“IMF Downgrades

Global Economic

Outlook Again”

“US Second Quarter

GDP Grows 3.9%”

“US Consumer Prices Rise

for Sixth Straight Month”

“US Oil Prices Fall to

Six-Year Low”


World Asset ClassesSecond Quarter 2016 Index Returns

Looking at broad market indices, emerging markets outperformed developed markets, including the US. Developed markets REITs recorded the highest

returns.

The value effect was positive in the US and emerging markets but negative in developed markets outside the US. Small caps outperformed large caps in the

non-US markets but underperformed in the US and emerging markets.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.

The S&P data is provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2016, all rights reserved. MSCI data © MSCI 2016, all rights reserved. Dow Jones data (formerly Dow Jones

Wilshire) provided by Dow Jones Indexes. Barclays data provided by Barclays Bank PLC.

5.42

4.58

4.31

3.79

2.46

2.21

1.31

0.66

0.40

0.04

-0.35

-1.05

-1.28

-2.17

Dow Jones US Select REIT Index

Russell 1000 Value Index

Russell 2000 Value Index

Russell 2000 Index

S&P 500 Index

Barclays US Aggregate Bond Index

S&P Global ex US REIT Index (net div.)

MSCI Emerging Markets Index (net div.)

MSCI Emerging Markets Small Cap Index (net div.)

One-Month US Treasury Bills

MSCI Emerging Markets Value Index (net div.)

MSCI World ex USA Index (net div.)

MSCI World ex USA Small Cap Index (net div.)

MSCI World ex USA Value Index (net div.)


US StocksSecond Quarter 2016 Index Returns

The broad US equity market recorded positive absolute

performance for the quarter.

Value indices outperformed growth indices across all size

ranges.

Small caps outperformed large caps.


(index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (S&P 500 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap

Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is

used as the proxy for the US market. Russell data © Russell Investment Group 1995–2016, all rights reserved. The S&P data are provided by Standard & Poor's Index Services Group.

0.61

2.46

2.63

3.24

3.79

4.31

4.58

Large Cap Growth

Large Cap

Marketwide

Small Cap Growth

Small Cap

Small Cap Value

Large Cap Value

Ranked Returns for the Quarter (%)

53%US Market $21.9 trillion

World Market Capitalization—US

Period Returns (%) * Annualized

Asset Class YTD 1 Year 3 Years** 5 Years** 10 Years**

Marketwide 3.62 2.14 11.13 11.60 7.40

Large Cap 3.84 3.99 11.66 12.10 7.42

Large Cap Value 6.30 2.86 9.87 11.35 6.13

Large Cap Growth 1.36 3.02 13.07 12.35 8.78

Small Cap 2.22 -6.73 7.09 8.35 6.20

Small Cap Value 6.08 -2.58 6.36 8.15 5.15

Small Cap Growth -1.59 -10.75 7.74 8.51 7.15


International Developed StocksSecond Quarter 2016 Index Returns

In US dollar terms, developed markets outside the US lagged

both the US equity market and emerging markets indices

during the quarter.

Small caps slightly underperformed large caps in non-US

developed markets.

The value effect was negative in non-US developed markets

using broad market indices across all size ranges.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market

segment (index representation) as follows: Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), and Growth (MSCI World ex USA Growth). All index

returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI World ex USA IMI Index used as the proxy for the

International Developed market. MSCI data © MSCI 2016, all rights reserved.

36%International Developed Market $14.9 trillion

World Market Capitalization—International Developed

-1.28

-2.17

-1.05

0.07

-1.55

-1.27

-0.35

0.57

Small Cap

Value

Large Cap

Growth

Ranked Returns (%) Local currency US currency



Large Cap -2.98 -9.84 1.88 1.23 1.63

Small Cap -0.69 -3.35 6.34 3.61 3.33

Value -4.68 -14.35 -0.24 -0.17 0.43

Growth -1.29 -5.25 3.94 2.58 2.75


Emerging Markets StocksSecond Quarter 2016 Index Returns

In US dollar terms, emerging markets indices underperformed

the US but outperformed developed markets outside the US.

The value effect was negative in emerging markets using broad

market indices. Large cap value indices underperformed large

cap growth indices. The opposite was true among small caps:

Small cap value indices outperformed small cap growth indices.

Small cap indices slightly underperformed large cap indices in

emerging markets.


(index representation) as follows: Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), and Growth (MSCI Emerging Markets Growth Index). All

index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. MSCI Emerging Markets IMI Index used as the proxy for

the emerging market portion of the market. MSCI data © MSCI 2016, all rights reserved.

11%Emerging Markets$4.4 trillion

World Market Capitalization—Emerging Markets

1.79

0.70

0.95

-0.36

1.71

0.66

0.40

-0.35

Growth

Large Cap

Small

Value

Ranked Returns (%) Local currency US currency



Large Cap 6.41 -12.05 -1.56 -3.78 3.54

Small Cap 1.38 -12.76 -0.01 -2.29 5.98

Value 7.41 -14.41 -3.30 -5.53 3.29

Growth 5.43 -9.83 0.08 -2.11 3.71


Select Country PerformanceSecond Quarter 2016 Index Returns

New Zealand recorded the highest country performance in developed markets, while Italy and Ireland posted the lowest performance for the quarter. In

emerging markets, Peru and Brazil again posted the highest country returns, while Poland and Greece recorded the lowest performance.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Country

performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), Russell 3000 Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI

data © MSCI 2016, all rights reserved. Russell data © Russell Investment Group 1995–2016, all rights reserved. UAE and Qatar have been reclassified as emerging markets by MSCI, effective May 2014.

-0.14

-1.48

-4.50

-4.93

-5.13

-5.92

-5.98

-6.74

-7.84

-12.01

-17.00

18.19

14.44

6.74

4.64

4.61

4.61

3.94

2.61

2.03

1.70

0.60

0.14

Peru

Brazil

Philippines

Russia

India

Indonesia

Thailand

Colombia

Chile

South Africa

UAE

Taiwan

China

Korea

Hungary

Egypt

Qatar

Czech Republic

Malaysia

Mexico

Turkey

Greece

Poland

Ranked Emerging Markets Returns (%)

-1.21

-1.22

-2.07

-3.12

-4.24

-5.36

-5.44

-5.46

-7.48

-8.41

-9.24

-10.67

-10.99

5.30

4.72

2.98

2.62

1.88

1.77

1.50

0.64

0.49

0.38

New Zealand

Canada

Norway

US

Belgium

Switzerland

Japan

Australia

Singapore

Hong Kong

Finland

Denmark

UK

Israel

France

Germany

Netherlands

Sweden

Spain

Portugal

Austria

Ireland

Italy

Ranked Developed Markets Returns (%)


Real Estate Investment Trusts (REITs)Second Quarter 2016 Index Returns

US REITs had very strong positive returns for the quarter,

outperforming the broad equity market. REITs in developed

markets recorded positive returns, also outperforming broad

developed equity markets indices.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT

stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US

Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones US Select REIT Index data provided by Dow Jones ©. S&P Global ex US REIT Index data

provided by Standard and Poor's Index Services Group © 2016.

60%US $662 billion99 REITs

40%World ex US $437 billion246 REITs(22 other countries)

Total Value of REIT Stocks

5.42

1.31

US REITs

Global REITs (ex US)

Ranked Returns (%)



US REITs 10.82 22.85 13.55 12.30 6.86

Global REITs (ex US) 10.02 7.25 6.96 5.91 3.31


CommoditiesSecond Quarter 2016 Index Returns

Commodities were broadly positive during the quarter. The

Bloomberg Commodity Index Total Return gained 12.78%.

Energy turned positive with natural gas gaining 30.88%, Brent

crude oil 19.51%, and WTI crude oil 18.64%.

The Softs complex was also positive with sugar gaining

29.84%, coffee 10.90%, and cotton 10.29%.

Grains were mixed: Soybeans returned 27.68%, yet Kansas

wheat and Chicago wheat declined 16.26% and 9.28%,

respectively.

Past performance is not a guarantee of future results. Index is not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.

All index returns are net of withholding tax on dividends. Securities and commodities data provided by Bloomberg.

Period Returns (%)


Commodities 13.25 -13.32 -10.55 -10.82 -5.59

* Annualized

-0.04

-4.74

-9.00

-9.28

30.88

29.84

27.68

23.09

19.78

19.51

18.64

15.47

10.90

10.73

10.29

8.06

6.67

3.01

2.19

1.33

Natural Gas

Sugar

Soybeans

Heating Oil

Silver

Brent Oil

WTI Crude Oil

Zinc

Coffee

Nickel

Cotton

Aluminum

Gold

Unleaded Gas

Corn

Lean Hogs

Copper

Live Cattle

Soybean Oil

Wheat

Ranked Returns for Individual Commodities (%)


Fixed IncomeSecond Quarter 2016 Index Returns

Interest rates across the US markets

generally decreased during the quarter.

The yield on the 5-year Treasury note

fell 20 basis points (bps) to end at

1.01%. The yield on the 10-year T-note

decreased 29 bps to 1.49%. The 30-

year Treasury bond declined 31 bps to

finish with a yield of 2.30%.

The 1-year T-bill ended the quarter

yielding 0.45% and the 2-year T-note

finished at 0.58%, for declines of 14 and

15 bps, respectively. The 3-month T-bill

increased 5 bps to yield 0.26%, while

the 6-month T-bill dipped 3 bps to

0.36%.

Short-term corporate bonds gained

1.05%. Intermediate-term corporates

returned 2.24%, while long-term

corporate bonds returned 6.64%.1

Short-term municipal bonds returned

0.66%, while intermediate-term

municipal bonds gained 1.84%.

Revenue bonds slightly outperformed

general obligation bonds.2

1.49

3.18

2.16

3.00

10-Year USTreasury

State andLocal

Municipals

AAA-AACorporates

A-BBBCorporates

Bond Yields across Issuers (%)

Period Returns (%)


BofA Merrill Lynch Three-Month US Treasury Bill Index 0.15 0.19 0.09 0.09 1.04

BofA Merrill Lynch 1-Year US Treasury Note Index 0.65 0.59 0.38 0.34 1.69

Citigroup WGBI 1–5 Years (hedged to USD) 1.86 2.36 1.82 1.84 2.98

Barclays Long US Government Bond Index 14.94 18.98 10.38 10.17 8.69

Barclays US Aggregate Bond Index 5.31 6.00 4.06 3.76 5.13

Barclays US Corporate High Yield Index 9.06 1.62 4.18 5.84 7.56

Barclays Municipal Bond Index 4.33 7.65 5.58 5.33 5.13

Barclays US TIPS Index 6.24 4.35 2.31 2.63 4.76

* Annualized

6/30/2016

3/31/2016

6/30/2015

0

1

2

3

4

US Treasury Yield Curve (%)

1Yr

5Yr

10Yr

30Yr


Global DiversificationSecond Quarter 2016 Index Returns

These portfolios illustrate the performance of different global

stock/bond mixes and highlight the benefits of diversification.

Mixes with larger allocations to stocks are considered riskier

but have higher expected returns over time.

Diversification does not eliminate the risk of market loss. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect expenses associated with the

management of an actual portfolio. Asset allocations and the hypothetical index portfolio returns are for illustrative purposes only and do not represent actual performance. Global Stocks represented by MSCI All Country World Index (gross

div.) and Treasury Bills represented by US One-Month Treasury Bills. Globally diversified allocations rebalanced monthly, no withdrawals. Data © MSCI 2016, all rights reserved. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™,

Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).

$0

$30,000

$60,000

$90,000

12/1988 12/1993 12/1998 12/2003 12/2008 12/2013

Growth of Wealth: The Relationship between Risk and Return

0.04

0.33

0.61

0.90

1.19

100% Treasury Bills

25/75

50/50

75/25

100% Stocks

Ranked Returns (%)


100% Stocks 1.58 -3.17 6.60 5.95 4.82

75/25 1.29 -2.16 5.06 4.62 4.12

50/50 0.95 -1.28 3.45 3.19 3.23

25/75 0.54 -0.52 1.78 1.66 2.16

100% Treasury Bills 0.09 0.10 0.04 0.04 0.91

* AnnualizedPeriod Returns (%)


Keeping Calm as Markets Carry on and onBy: James R. Solloway, CFA, Managing Director and Senior Portfolio Manager

Oaks, Pennsylvania—the leafy, suburban headquarters of SEI—will never be mistaken for Center City, Philadelphia, much less midtown Manhattan or the City of London. But that doesn’t mean nothing interesting ever happens here. In April, presidential primary candidate Bernie Sanders held a big rally at the convention center located just a mile away from the SEI campus. More recently a black bear was sighted in the nearby towns of Phoenixville and Collegeville. Nowadays, when I take my early-morning walk along the not-so-mighty Perkiomen Creek, I employ the same hyper-vigilance I once did as I walked through some of the rougher neighborhoods of New York City as a teenager during the early 1970s.

Granted, the only reason why a black-bear sighting near Oaks would be news is because it’s such a rarity. In the financial markets, on the other hand, bears can be found all over the place. Angst is another item everyone seems to have in common across the world—even before the citizens of the United Kingdom stunned the world by voting to leave the European Union (EU). In fact, one of the more remarkable aspects of the 87-month bull market in the S&P 500 and its 260% plus total return is how skeptical investors have been almost since the start. Every sharpish correction has been heralded as the beginning of the next bear market.

Exhibit 1 highlights this sour mood. Currently, only 22% of individual investors term themselves bullish on equities, well below the historical average reading for this measure of investor sentiment. Since the start of the bull market in the second week of March 2009, investor sentiment has shown a great deal of week-to-week volatility, but it has fluctuated below its long-term average more than half the time. We are reminded of Sir John Templeton’s famous quote, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” On that basis, this bull seems to be a long way from death’s door.



Brexit Wrecks It

The United Kingdom’s vote to leave the EU, however, is a major political and economic event that will likely weigh on international financial markets, not just for weeks and months, but perhaps for years. The negative reaction in the immediate aftermath of the decision was one for the record books, made worse by the fact that markets had rallied strongly in the days prior to the vote on the expectation that a “Remain” decision was in the bag. Currencies fell dramatically, led by a 12% slump in sterling against the greenback. Sovereign bond yields dropped to new record lows in many cases (although European periphery bond yields initially blew out as investors sought safe havens, they have mostly recovered to pre-Brexit levels). Equities, meanwhile, fell across the board.

Surprisingly, the sell-off lasted just a couple of days and risk-assets have rebounded. The FTSE 100, the U.K. index comprised of the largest companies and featuring a heavy bias toward energy and financials, has rebounded to a level even higher than where it closed the day before the vote. The FTSE 250, by contrast, fell harder and remains well below its pre-Brexit level. The FTSE 250 is much more domestically oriented than the FTSE 100, and is the better measure by which to gauge investors’ views regarding the British economy. Exhibit 2 highlights the day-to-day gyrations of the two indexes so far this year. The superior performance of the FTSE 100 this year is unusual. The FTSE 250 has been the better performer on balance since 1999. The FTSE 100 tends to do better only during recessionary periods and other periods of stress or intense financial market uncertainty.

The United Kingdom’s leap into the unknown will likely depress economic growth as business spending gets frozen in its tracks until some clarity re-emerges in the country’s trading relationship with the European Union. New trade agreements with other countries must be reached too. In addition, the political blowback of the “Leave” vote will take time to work out. Prime Minister

David Cameron’s resignation leaves him a lame duck for the next two or three months. Until a successor is chosen, exit planning will be highly preliminary. The clock to exit the EU doesn’t start running until the U.K. government invokes Article 50 of the Lisbon Treaty, which signals the formal decision to leave the Union. Once that occurs, the country exits two years later – unless there is a unanimous vote on the part of the 27 remaining members to extend the deadline. One reason for the rather strong rebound in equity prices in the week after the vote was the hope that Article 50 would not be invoked for a long time. We do not find this a likely outcome. Few businesses will be willing to make long-term investment commitments in a state of Limbo.



As if a rudderless government isn’t bad enough, Brexit also has rekindled the fires of Scottish separatism. At some point in the next couple of years, the Scottish National Party could well press for another referendum because the electorate voted overwhelmingly to remain in the EU. In the meantime, it’s not just the ruling Conservative Party that is in a state of disarray. The main opposition Labour Party is going through its own post-Brexit upheaval. Just days after the vote, scores of Shadow Ministers and other front-benchers resigned in protest against the lackluster support for “Remain” provided by the party’s leader, Jeremy Corbyn. Three-quarters of Labour MPs then passed a non-binding no-confidence vote on Mr. Corbyn’s leadership, which the LabourParty head completely ignored.

We find it ironic that, prior to the Leave vote, the intermediate-term outlook for the U.K. economy didn’t look all that bad. Exhibit 3 ranks the performance of a variety of developed and developing economies in terms of the cumulative change in their inflation-adjusted gross domestic product (GDP) since the end of the global recession in the second quarter of 2009. The United Kingdom’s performance is slightly better than Germany’s and almost on par with that of the United States. As is the case in the U.S., however, the U.K. expansion looks good relative to other countries, but is less than stellar considering the depth of the preceding recession. Away from the global hub of London, the recovery doesn’t feel quite as pronounced, hence the higher proportion of Leave votes in most of the English countryside and traditional manufacturing areas.

In recent quarters, business activity in the U.K. has slowed to a 2% year-over-year growth rate as emerging Brexit concerns dampened investment. Still-sluggish economic conditions in Europe and across much of the world haven’t helped either, serving to depress goods and services exports. This weakness will likely deepen now. SEI’s international managers, however, have been taking a more upbeat view, overweighting U.K. equities with an emphasis on quality and on value, while underweighting more defensive sectors.

Fixed-income managers, meanwhile, are attracted by the relatively high bond yields on offer in the U.K. (although 10-year Gilts slid 50 basis points in June to end the month at 0.87%) versus the near-zero and negative rates available in Europe and Japan. Following the Brexit vote, these positions are naturally in review.

Sterling’s plunge to $1.30 from $1.50 immediately following the Leave vote should provide a much-needed offset to the mostly negative impact of all the uncertainty. But the fear of the unknown will likely offset the positive of a cheap currency, at least in the months immediately ahead.



Nonetheless, U.K. exporters now find themselves in a more competitive position. Since the U.K. is still in the EU as a full member, enjoying the preferential tariff treatment that membership confers, the trade deficit may narrow dramatically over the next year or two. position. Since the U.K. is still in the EU as a full member, enjoying the preferential tariff treatment that membership confers, the trade deficit may narrow dramatically over the next year or two.

Exhibit 4 tracks the trade-weighted sterling exchange rate (the blue line) versus the trend in U.K. company earnings per share (the orange line), as compiled by FactSet Research Services. The right axis measuring the exchange rate has been inverted, so a rising blue line means the currency is depreciating. During the global financial crisis the currency plunged from 105 to 75, spurring a sharp recovery in expected earnings between 2009 and 2011. Over the next few years, however, the pound strengthened and helped to drag earnings down. The past year’s sharp depreciation should prove helpful in stabilizing this dispiriting earnings trend. Earnings need to improve in a sustained fashion to alleviate valuation concerns. Earnings multiples have climbed to a relatively high level in recent quarters, even as the equity market has treaded water.

What Will Happen to Europe Now That Britannia Waives the

Rules?

Britain’s growth prospects were decent prior to Brexit; by contrast, continental Europe was struggling to improve to the equivalent of decent. To be sure, some green shoots of recovery have appeared as the European Central Bank’s easing policies have become increasingly aggressive. Loans to households and businesses are expanding, but at a lackluster 1%-2% rate. Eurozone GDP accelerated above 2% in the first quarter at a seasonally adjusted annual rate, but growth of retail sales excluding autos have been slowing since the start of the year. Industrial production, meanwhile, has been rising at a slow but fairly consistent pace and purchasing managers in the manufacturing industries are reporting modestly better conditions. The sharp decline in the euro in 2014 and in early 2015 also has provided a boost to exports. Imports continue to lag, however. Of the many economic imbalances that exist in the world, among the greatest is the huge trade surplus run by the eurozone.



Most of the blame can be laid at the feet of Germany, where the current-account surplus recently reached 8% of GDP. Domestic aggregate supply in the eurozone far outstrips demand. Most of the larger European countries have yet to reach their previous cycle peak in GDP attained nine years ago.

Domestic aggregate supply in the eurozone far outstrips demand. Most of the larger European countries have yet to reach their previous cycle peak in GDP attained nine years ago.

There is a nagging concern that Europe is heading down the same road of secular decline as Japan. Populations are aging. Structural rigidities in labor and product markets inhibit the adjustment process. Over-indebtedness and Germany-led political resistance prevent an adequate fiscal response. The wildly disparate economic capabilities between a Germany and an Italy or a Spain within the confines of a single currency do not help matters. European Central Bank President Mario Draghi keeps pointing out that the various tools of monetary policy—negative interest rates, quantitative easing, targeted long-term refinancing operations, etc.—cannot solve all of Europe’s problems. Unfortunately, structural reforms are hard to do – just ask the French, in a country where youth unemployment is languishing at 23.5%, above the eurozone average.

Deflation remains the specter that haunts the Continent. The core inflation rate remains below 1%, not much better than Japan’s. Headline CPI as measured by the Eurozone Harmonized CPI continues to hover near negative territory (Exhibit 5). No wonder voters are fit to be tied, with some electorates even less enthralled with the European Union than the British. In the aftermath of the “Leave” vote, nationalist parties in various countries are lobbying for their own referendums on continued membership in the EU. Whether any votes actually occur, and whether they lead to a result in favor of Leave, is mere speculation at this point. But it adds to the uncertainty facing investors at a time when the European economy remains in an exceedingly fragile state.

Going into the Brexit vote, our international managers were adding to their European equity positions on a combination of supportive monetary policy, low valuations and the incremental improvement in economic activity.

On the fixed-income side, our global managers maintain a slight underweight to interest-rate duration and an overweight to credit. The focus is on relative value, not directionality. There is a preference for bond exposure in the U.S., U.K., Australia and select emerging markets versus Europe and Japan. They also are long U.S. and U.K. inflation protection versus nominal bonds. Bond positions are currency-hedged by going long the U.S. dollar, Norwegian krone and Swedish krona and underweighting the Japanese yen and euro.



The ability of the equity market to bounce back from the immediate shock is heartening. But these are early days, and it is hard to draw firm conclusions on how disruptive Brexit will be on future EU and eurozone economic activity. But the fragility of the recovery going into this crisis is a matter of deep concern. The fact that bond yields did not bounce higher even as stock prices rallied post-Brexit is a divergence worth noting.

The U.S. Economy: Leading or Leaden?

The U.S. remains, in our opinion, the cleanest shirt in the laundry bag. The country’s economic growth has plodded along at a rate that has disappointed the optimists. By the same token, it has managed to surprise the pessimists, staying resilient despite numerous shocks of one kind or another over the past seven years. We would bet this resiliency will once again be on display following the U.K. vote.

U.S. inflation-adjusted GDP has advanced 15% since the second quarter of 2009, a relatively good performance versus Japan and most of the major European economies. Nonetheless, as we have pointed out throughout this expansion, the recovery in business activity from the prior sharp decline of 2007-09 has been extremely subdued versus the usual robust rebound recorded in previous cycles.

Many observers worry that the U.S. economy has stumbled into another soft patch, despite signs that second-quarter GDP has accelerated from the first. Economists, policymakers and investors all were taken by surprise at the weakness of the most recent (May) payroll employment result. The May figure was the weakest month-to-month result since 2010, when a series of declines in employment were registered. Expectations of an imminent rise in the Federal funds rate were dashed, the dollar logged a sharp decline in its value against other currencies, bond yields sunk and equities were once again put on the defensive. Post-Brexit vote, it’s a near-certainty that the U.S.

central bank will keep the Federal funds rate at its current level through the rest of the year, even if U.S. growth proves unexpectedly robust.

It’s worth noting that other labor market data are not quite as downbeat as payrolls. Exhibit 6 displays the trends in job openings and hiring. We use a three-month moving average to smooth out the volatility. Job openings remain in a solid uptrend, rising well beyond the previous cycle’s peak reached in mid-2007. Hiring also continues to trend higher, although the gains here are definitely more subdued than those for openings. This may reflect a mismatch between the skills needed for the jobs available versus those the jobseekers actually possess. In any event, consumer views of the current labor market (the orange line in Exhibit 6) remain fairly benign, although this statistic hasn’t quite gotten back to the previous peak achieved nine long years ago.



In addition, there has been very little improvement in households’ labor-market appraisals since last December.

If the trend in employment is flattening out, does it signal a weakening of the economy, or is it something else? We think it might be something else, namely, the first sign that the labor market is nearing full employment. At a May reading of 4.7%, the U.S. headline jobless rate has reached an area consistent with the full employment concept. If that’s the case, then stagflation becomes a possibility. Everyone is familiar nowadays with the stagnation part of the term “stagflation,” otherwise known as the New Normal. The inflation part is less familiar to anyone under the age of 45. Most developed countries are still trying to pull out all the stops to boost their inflation rates. Back in the 1970s, however, two oil shocks and a vicious wage-price spiral pushed the U.S. consumer-price inflation rate into the mid-teens and the unemployment rate into the high single-digits during the latter part of the decade (Exhibit 7). Today, only a few extremely poorly managed countries (Brazil immediately springs to mind, for example) currently face a 1970s-style stagflation economic regime.

Obviously, the U.S. is not going back to the days of bell-bottomed jeans and disco music (at least we hope not!). But the first hints of wage pressure are beginning to come through, with a moderate acceleration in wages and in total labor compensation apparent on a year-over-year basis. The growth in unit labor costs has edged up to 3% (year-over-year). As corporate margins get squeezed by the pick-up in labor costs, the pressure to raise prices will likely intensify.

This puts the Federal Reserve (Fed) in something of a quandary, since the Brexit shock has upended any possibility of a near-term rise in the funds rate. Market-implied expectations for the next policy-rate move have been pushed out to late 2017; in fact, futures traders have priced in the mild possibility of a rate cut in the near term.



Yet, we admit to a growing uneasiness that the central bank may be a falling behind the inflation curve. The so-called Taylor Rule, named after Professor John Taylor of Stanford University, provides some insight into where the Federal funds rate should be versus where it is (Exhibit 8). This rule is based on three factors: actual versus targeted inflation levels, actual employment or output versus full employment levels and the level of short-term interest rates thought to be consistent with full employment.

The Taylor Rule suggests that the federal Funds rate should be closer to 1.5% rather than its actual range of 0.25%-to-0.50%.

The acceleration in the measures of labor compensation cited above would seem to corroborate the idea that labor-market conditions have tightened to the point where these labor-market pressures may prove to be more sustained than at any other time during this expansion. The Fed’s preferred inflation measure, the Personal Consumption Expenditures Price Index, has edged closer to the central bank’s target of 2%, with the headline figure up 1.1% year-over-year and the core reading at 1.6%. Exhibit 9 breaks down the PCE price index into its three major component parts—durables, nondurables and services. The outright declines in durable- and nondurable-goods prices have masked the stickiness of the inflation rate in services. The persistent weakness in goods prices reflects a variety of factors – the plunge in energy and other commodity prices, the dollar’s sharp appreciation on a trade-weighted basis since 2011, the sluggish global economy that has intensified foreign competition in tradable goods. These deflationary forces are slowly fading. Even after theBrexit shock, oil prices remain near $50 a barrel, the dollar is trading near its year-ago level on a trade-weighted basis.

Fed Chair Janet Yellen argues that there is a large pool of unemployed and underemployed workers that can be coaxed back into full-time employment, thus mitigating the apparent tight labor supply. But we doubt that is the case. As we have pointed out in previous reports, the broadest measure of U.S. unemployment (taking into account those people who are marginally attached to the workforce or are working only part-time for economic reasons) has fallen dramatically, from a high of high of 17% in 2009 to below 10%. The low point in the last cycle was 8%. Maybe we can get there, but we would argue higher wages will be needed to coax the participation rate to a higher level.



We understand that the still-soggy global economy and the shock delivered by the U.K. vote argue for a very cautious process of interest-rate normalization. Even in the U.S., industrial output has been rather weak, with total production falling 1.4% over the past year and capacity utilization dipping to less than 75%, about five percentage points below its long-term average. If the upward trend in labor costs is sustained,

however, the view that excess capacity will keep inflation permanently low will need to modified, and a more aggressive response by the U.S. central bank eventually will be justified.

In the meantime, SEI’s U.S. fixed-income managers have benefitted from a narrowing of the Treasury yield curve and the tightening of credit spreads. Brexit, of course, has sparked a global rally in bond prices. TheBarclays U.S. Aggregate Bond Index is up 5.3% through the end of June. Interestingly, high-yield securities have returned 8.7% over the same time span, as measured by the Barclays U.S. Corporate High Yield Index. Although yields edged higher in the aftermath of the Brexit vote, the reaction has been muted. Our high-yield managers are underweight duration but overweight spread. On a sector basis, energy and materials remain underweight.

SEI’s U.S. equity managers have had a risk-on position within their portfolios. Safety, stability and momentum factors have been viewed as expensive. Managers have favored value and aggressive-growth characteristics instead. Post-Brexit, this risk-on positioning has been tempered. An outright defensive posture is not being adopted, however. The view remains that stability-oriented assets are relatively expensive, but the uncertain economic outlook in Europe continues to drive investors into defensive assets.



Japan’s Problems Multiply

One of the more surprising market responses to the U.K. Brexit vote is the sharp appreciation of the Japanese yen. This is last thing that the country needs, since an ultra-strong currency exacerbates the downward pressure on inflation. The Bank of Japan (BoJ) continues to miss its 2% inflation target. The targeted inflation measure (the CPI excluding fresh food but including energy) remains mired near zero. In addition, corporate earnings have begun to roll over in response to the currency’s appreciation. Much of the rally in stock prices between the second half of 2012 and the middle of 2015 was the result of the sustained weakening of the yen. As Exhibit 10 highlights, there has been a close inverse relationship between the yen and the path of equity prices over the past 10 years.

As Japanese yields sink further into negative territory across the curve –interest rates on Japanese sovereign paper are now below zero out to 15 years – we wonder what kind of rabbit BoJ Governor Haruhiko Kuroda can pull out of his hat. Interest rates can be pushed deeper into the red, but the most recent moves in rates have failed to weaken the currency or boost the economy. We find it hard to see many economic bright spots. Overall industrial production has been sagging since early 2014, weighed down by a 10% contraction in investment goods over this period. Household spending on goods, services and housing have been trendless over the past three years. The merchandise trade balance has pushed back into the black following five years of deficits, but this “improvement” merely reflects that fact that imports have slumped more sharply than exports (Exhibit 11).



The only support for the economy has come from government spending, which has been growing close to a 3% annualized rate over the past two quarters. In addition, Prime Minister Shinzo Abe recently made the decision to delay the scheduled hike in the country’s value-added tax until October 2019. It was probably a wise thing to do. The Japanese economy appears even more sluggish now than it was just prior to the last VAT hike in April 2014. The economy promptly fell into recession back then on the back of a sharp downturn in consumer spending, dealing a harsh blow to what had been a promising start for Abenomics. Of course, this delay in the VAT hike also sets back the timetable for achieving a stabilization of the country’s fiscal position. At 216% of GDP, the central government’s debt will remain by far the largest among the major developed countries (Exhibit 12).

SEI’s international equity managers are underweight Japan, given the weak fundamental outlook. Domestic managers in Japan, on the other hand, tend to be more optimistic. They emphasize the improvement in corporate governance and the increased willingness of companies to increase dividends and engage in stock buybacks. In addition, the country’s banking system seems to be weathering the negative interest-rate regime. Cyclical stocks, technology, healthcare and mid-to-small banks have been favored by Japan-based managers. As is true in other geographies, stability and momentum are judged to be expensive and have been underweighted in portfolios. The post-Brexit surge in the yen is a major concern, however. The pressure is rising on the government to respond with new fiscal and monetary measures.

Japan’s poor economic performance is the result of (1) unfavorable demographics (although we would note that there has been a pick-up in the fertility rate); (2) industries that are highly resistant to reforms; and (3) the persistent slowdown in China’s growth rate.



The China Conundrum

To steal a phrase from Winston Churchill, the Chinese economy is a riddle wrapped in a mystery inside an enigma. Investor fears earlier this year of an imminent debt and currency meltdown have receded. The government continues to use the old and familiar economic playbook: Encourage growth fueled by additional debt, prop up state-owned enterprises and allow its currency to fall. Economic and financial reforms are proceeding, but at an erratic pace. Right now, that pace of reform seems slower than usual; propping up the economy through government-directed measures is taking priority.

China’s economy mostly appears to treading water, much like the rest of the world. SEI’s managers are generally cautious on the country. Indeed, China’s stock market has been out of favor relative to rest of the world since 2010 (Exhibit 13). We think the behavior of copper is a fair reflection of the China’s economic health. The relative price of copper peaked on a secular basis in May 2006; the MSCI: China Total Return Index logged its secular peak in October 2007 versus the MSCI: All-Country World Index. Chinese equities then found a cyclical bottom in September 2008 and the relative performance of copper followed suit in December. In 2010, copper and Chinese equities rolled over on a relative basis within three months of each other. Neither copper nor Chinese equities have shown much spark this year despite the risk-on environment for emerging-market assets and commodities that began in late January. Rather than trying to make sense of the country’s macroeconomics, the focus of our managers is on idiosyncratic opportunities.

India, by contrast, carries a greater-than-market weight in the portfolios of our managers. This has been a mixed call: The MSCI: India Total Return Index is up a slight 1.8% in the year-to-late in U.S. dollar terms.

Through the first six months of 2016, it is lagging Brazil (+46.5), Russia (+20.6%) and South Africa (+15.9%) among the BRICS. However, as Exhibit 14 highlights, India can be viewed as the “safe-haven” emerging-equity market. Since the start of 2014, the MSCI: India Total Return Index has been one of the steadier performers among the BRICs, and it has enjoyed a cumulative return over this period of 18% --on par with the return of the MSCI: U.S. Index. The other BRICS have been far more volatile, with China lagging the least (-4.5% cumulative return) and both Brazil and Russia off a respective 25.7% and 31.3%.



Although the recent resignation announcement of Raghuram Rajan, the well-respected head of India’s central bank, has spurred concerns that monetary policy reforms will be reversed, Prime Minister Narendra Modi probably realizes that policy continuity and central-bank independence are necessary to attract foreign capital into the country. In the meantime, the Modi government continues to press ahead with its reform agenda, winning some battles while losing others. The initial euphoria that greeted the new government two years ago is gone, but the potential for fast economic advancement is not. Infrastructure spending, especially for roads and rails, is being ramped up. A new bankruptcy code is now being implemented that will address the backlog of bad debts on banks’ balance sheets and kill off the zombie companies that impede the financing of new projects and businesses. SEI’s emerging-market managers are overweight Indian financial stocks on the assumption that they should benefit from healthy credit growth.

Generally speaking, our emerging-market equity managers are finding more attractive opportunities outside Asia. Latin America has been getting more attention, for example, as severe economic setbacks in the region spur major potentially game-changing political and economic reforms perceived as business- and investor-friendly. Brazil has been a big winner, despite political turmoil and the harshest recession experienced in decades. But investors have endured a wild ride. As we mentioned above, the MSCI Brazil Total Return Index is up about 46% in the year-to-date, but remains some 40% below its September 2014 high. During the sell-off from November last year to January, the index plunged 28%. Mexico, also favored by SEI’s managers, has been a more sedate performer. The stock market initially suffered a sharp pullback in response to the Brexit vote, but subsequently recovered to end about 1% higher in dollar terms in the year-to-date through June 30; in local currency, the MSCI: Mexico Total Return Index is up a more robust 8.5%. Although the Mexican economy has shown decent growth, we suspect

the anti-NAFTA rhetoric that has featured so prominently in the U.S. presidential campaign could be depressing investor sentiment.



Emerging-market equities as an asset class are still bumping along the bottom (Exhibit 15). But the MSCI Emerging Markets Index relative to the World Index has displayed a surprising resiliency in the face of adverse news over the past several months. We believe that emerging-market equities are valued appealingly, especially against the backdrop of improved commodity pricing and positive political catalysts.

The story is similar for emerging-market debt. Our managers think that things are not as bad as they seem in places like Brazil and Turkey. Even Venezuela has its attractions despite its dysfunctional economy and even more dysfunctional politics. The country is committed to paying down its debt. It also has gold reserves upon which it can draw. And, of course, the recovery in oil prices has enhanced its ability to service its obligations.

SEI’S emerging-market debt managers are underweight duration, overweight spread, underweight hard and local-currency debt and overweight cash.

Geographically, they favor Latin America and the Middle East, while underweighting Asia and Europe. The spread between emerging-market debt and U.S. Treasury yields have widened, but mostly because the latter have fallen.

Politics Complicates the Outlook

As we noted earlier, the political establishment in the United Kingdom is in disarray. This will delay negotiations with the European Union and prolong the uncertainty for businesses on both sides of the Channel. The U.K., however, isn’t the only nation facing intense voter discontent and possible upheaval. The recently concluded election in Spain, for example, gives the establishment right-of-center party led by acting Prime Minister Mariano Rajoy a chance to form a coalition government. But the negotiations could be as difficult as they were following the inconclusive election held last December. There is no guarantee these talks will be any more successful.



In October, Italian voters go to the polls to determine the fate of a constitutional referendum on reorganizing the Parliament. This constitutional change is championed by Prime Minister Matteo Renzi and his PD party; a defeat could result in the government’s fall. As in so many other countries, the electorate is in a feisty and cantankerous mood. The anti-establishment Five Star Movement party recently made huge inroads in mayoral elections, taking 19 towns and cities including Rome and Turin. If Five Star manages to gain control of the central government after the October vote, a referendum on continued EU membership becomes likely.

U.S. voters will go to the polls in November in which is shaping up to be one of the most polarizing contests in recent history. And in 2017, general elections will be held France and Germany. France’s Socialist President Francois Hollande is extremely unpopular. He is not expected to survive the first round of voting in April. Marine Le Pen, the head of the anti-immigrant National Front Party, could come in first place after the first round. Winning the second round will be a harder push, but her anti-establishment positions against immigration, the EU and the euro are playing well at the moment.

As is often the case, politics impacts the markets. With the spirited philosophical contests we are seeing in the latest round of elections it would take a magical crystal ball to clearly see what lies ahead.

This material represents an assessment of the market environment at a specific point

in time and is not intended to be a forecast of future events, or a guarantee of future

results. This information should not be relied upon by the reader as research or

investment advice regarding the Funds or any stock in particular, nor should it be

construed as a recommendation to purchase or sell a security, including futures

contracts.

There are risks involved with investing, including loss of principal. International

investments may involve risk of capital loss from unfavorable fluctuation in currency

values, from differences in generally accepted accounting principles or from

economic or political instability in other nations. Emerging markets involve

heightened risks related to the same factors as well as increased volatility and lower

trading volume. Narrowly focused investments and smaller companies typically

exhibit higher volatility. Bonds and bond funds will decrease in value as interest

rates rise. High-yield bonds involve greater risks of default or downgrade and are

more volatile than investment-grade securities, due to the speculative nature of their

investments.

Index returns are for illustrative purposes only and do not represent actual portfolio

performance. Index returns do not reflect any management fees, transaction costs or

expenses. One cannot invest directly in an index.

Information provided by SEI Investments Management Corporation, a wholly owned

subsidiary of SEI Investments Company. Neither SEI nor its subsidiaries is affiliated

with your financial advisor.

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