Research & Insights

Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist

After three quarters in which a host of geopolitical uncertainties and slowing global economic growth saw investors continue to boost US equities at the expense of everything else, the combination of increasing political dysfunction in the US (culminating with a government shutdown in December) and ongoing and unresolved concerns over trade were finally enough to catalyze a broad-based sell-off in the fourth quarter. The US Fed’s hawkishness only added to the negative sentiment around risk assets. While measures of consumer sentiment were generally positive given modestly rising wages, businesses were beginning to warn more consistently of the negative impacts that the trade disputes were having on current operations and future planning.

Given all of these factors, US markets posted significantly negative results for the fourth quarter, with some entering “bear” territory and others barely staying above. The Russell 3000 Index finished the quarter with a return of -14.3%, one of its worse performances ever. Small cap stocks were particularly hard hit with the Russell 2000 Index returning -20.2% versus the Russell 1000 Index returning -13.8%. Markets outside of the US fared somewhat better, having already posted negative returns for the year so far. The developed market MSCI World ex USA Index returned -12.8% while the developing market MSCI Emerging Markets Index returned -7.5%. Fixed income markets held up much better in the sell-off with the Bloomberg Barclays US Aggregate Index returning +1.6%.

In the US at the Sector level, Energy (-26.3%) was the worst performer for the quarter by far as oil prices fell precipitously on supply and demand concerns. Returns in Technology (-18.2%) and Producer Durables (-18.1%) were also strongly negative. The only relative safe havens in the drawdown were the defensive sectors of Utilities (-3.0%) and Consumer Staples (-6.7%).

Outside of the US, the sectors trends were largely the same. Energy (-16.0%) and Technology (-15.1%) were also the main detractors while Utilities (-3.5%) and Consumer Staples (-7.3%) held up better. At the country level, the best and worst performers were once again found among the smaller markets. Austria (-19.5%) and Greece (-19.2%) led decliners while Brazil (+14.2%) and Indonesia (+11.6%) rallied.

Market volatility jumped significantly during the quarter with implied and actual price volatility measures reaching materially above average levels. At the factor level, Smaller Size and Momentum were both strongly negative while Stability, Yield, Value, and Low Volatility were meaningfully positive. An equal-weighted portfolio underperformed the market-cap weighted portfolio once again as larger cap names outperformed.

Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist

Trade and geopolitical uncertainty continued to be on the forefront of investors’ minds in November. Although many markets (most notably emerging markets) posted positive returns for the month, the path to those gains was anything but smooth. The Russell 3000 Index finished the month with a return of +2.0% but had been down for the period coming into the final week. Smaller cap stocks were slightly off the pace with the small cap Russell 2000 Index returning +1.6% versus the large cap Russell 1000 Index’s return of +2.0%. Performance in non-US markets was more divergent. The developed market MSCI World ex USA Index returned a modest -0.1% while the developing market MSCI Emerging Markets Index returned +4.1%. The US dollar was incrementally higher which dampened returns for US investors. Fixed income markets were mixed as yields fell but credit concerns rose. The Bloomberg Barclays US Aggregate returned +0.6%.

At the sector level in the US, Health Care (+6.2%) was the best performing sector with Materials (+3.5%), Producer Durables (+3.4%), and Utilities (+3.2%) also strongly positive. Energy (-3.2%) was the worst performing sector as supply pressures continued to weigh while Technology (-2.5%) was also negative on earnings and growth concerns.

Outside of the US, Utilities (+3.9%) and Technology (+2.4%) were the best performers with Technology results being a notable difference from the US. Energy (-4.1%) and Materials (-2.5%) were the only negative sectors for the month. At the country level, emerging markets were the main leaders with Turkey (+13.2%), Indonesia (+13.0%), and Macau (+12.8%) significantly positive. The small markets of Argentina (-8.9%), Malta (-8.7%), and Greece (-5.2%) led decliners.

While the month saw streaks of positive and negative performance, market volatility as shown by realized and implied volatility measures was actually lower than what was witnessed in the sell-off of the prior month. Trade volumes also declined from the prior month but were still at slightly higher levels than the recent past. At the factor level, the defensive attributes of Stability, Value, and Yield were positive while Quality, Momentum, and Smaller Size were modestly negative. Equal-weighted portfolios underperformed market-cap weighted portfolios once again given the drag of smaller size.

Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist

October was host to a broad-based market decline as concerns over trade and uncertainty around the outcome of the impending US mid-term elections caused investors to reassess their positioning. The Russell 3000 Index finished the month with a return of -7.4%. Smaller cap stocks and growth-oriented names bore the brunt of the risk-off sentiment. The small cap Russell 2000 Index returned -10.9% versus the large cap Russell 1000 Index’s return of -7.1%. Equity markets were overwhelmingly negative around the world and few safe havens could be found. The developed market MSCI World ex USA Index returned -8.0%, and the developing market MSCI Emerging Markets Index returned -8.7%. The US dollar rallied in the month, adding to the negative returns for US investors. Fixed income markets were modestly negative as yields increased incrementally. The Bloomberg Barclays US Aggregate returned -0.8%.

At the Sector level in the US, Energy (-12.0%) was the worst sector as oil prices began a precipitous drop from recent highs of mid-$70s/barrel. Materials (-11.1%) and Producer Durables (-10.8%) were also significant decliners. Defensive areas such as Consumer Staples (+1.4%) and Utilities (-0.1%) were spared in the drawdown.

Outside of the US, all sectors were negative with the formerly high-flying Technology sector (-11.9%) pacing the decliners. Results in Materials (-10.0%), Producer Durables (-9.9%), and Consumer Discretionary (-9.6%) were also meaningfully negative. At the country level, almost all countries were negative with emerging markets once again the most notable markets. Mexico (-17.2%) and South Korea (-14.4%) were on one end, and Brazil (+18.8%) was on the other.

Market volatility spiked up as realized and implied volatility measures hit near-term peaks. Trade volumes were also higher but, highlighting the extended soporific state of the markets, only managed to reach their historical averages. At the factor level, Smaller Size was very negative while exposure to Momentum also detracted. Stability, Value, Yield, and Low Volatility – all defensive in nature – posted decently positive results. Equal-weighted portfolios underperformed market-cap weighted portfolios given the drag of smaller size.

Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist

Trade was once again the most conspicuous concern for the markets in the quarter. With the posturing from each party becoming more and more confrontational, it was hard to see any “winners” emerging for all the “losses” of comity and shared beliefs in the benefits of free trade, hallmarks of what used to mark these discussions. However, with consumer and business confidence strong in the US, supported by an exceedingly robust job market and healthy corporate performance, investors were largely able to look past the negative news. Towards the end of the quarter, what started to weigh on the markets more was the upward move in interest rates that accompanied this good economic outlook. The yield on the US 10Y moved consistently above 3% which began to dent investor enthusiasm for risk assets.

Despite this myriad of geopolitical tensions, US markets posted strong results for the third quarter. The Russell 3000 Index finished the quarter with a return of +7.1%, one of the strongest quarters of the last several years. In a reversal of the second quarter, small cap stocks lagged meaningfully with the Russell 2000 Index returning +3.6% versus the Russell 1000 Index returning +7.4%. Markets outside of the US were more mixed. The developed market MSCI World ex USA Index returned +1.3% while the developing market MSCI Emerging Markets Index returned -1.1%. Fixed income markets were fairly muted with the Bloomberg Barclays US Aggregate Index returning +0.0%.

In the US at the Sector level, Health Care (+13.2%) was by and far the best performer for the quarter as investor enthusiasm for growth stories returned. Returns in Producer Durables (+8.9%) and Technology (+8.8%) were also strongly positive. While all sectors were positive for the quarter, the cyclical sectors of Energy (+0.0%) and Materials (+0.5%) were relative laggards.

Outside of the US, Health Care (+4.5%) also led but with a much more modest return. Unlike in the US, Energy (+4.1%) was actually another strong sector in non-US markets. The growth sectors of Consumer Discretionary (-2.8%) and Technology (-1.8%) were the main negative performers. At the country level, the best and worst performers were once again some of the smaller markets. On the positive side were Luxembourg (+16.2%), Thailand (+13.0%), and Poland (+12.5%) while Turkey (-20.9%), Greece (-19.3%), and Macau (-19.2%) led decliners.

Market volatility fell to even lower levels in the quarter with implied and actual price volatility measures both close to a full standard deviation lower than their historical averages. At the factor level, Smaller Size and Value were both strongly negative while Stability and Low Volatility rebounded from the weak performance of the prior quarter. Momentum was also positive while Quality was neutral. An equal-weighted portfolio underperformed the market-cap weighted portfolio as market breadth narrowed once more.

Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist

August saw the continued dominance of the US markets. The Russell 3000 Index finished the month with a return of +3.5%. Smaller cap stocks led on increased risk appetite and a perception that they were more insulated from trade issues. The small cap Russell 2000 Index returned +4.3% versus the large cap Russell 1000 Index’s return of +3.5%. Most other equity markets declined on concerns over trade and a roiling crisis in emerging markets. The developed market MSCI World ex USA Index returned -1.9%, and the developing market MSCI Emerging Markets Index returned -2.7%. US dollar strength added incrementally to the negative returns for US investors. Fixed income markets were modestly positive as US 10 year yields fell slightly. The Bloomberg Barclays US Aggregate returned +0.6%.

At the Sector level in the US, Technology (+7.1%) was the standout performer by far although other growth-oriented areas such as Consumer Discretionary (+4.8%) and Health Care (+4.8%) were also strongly positive. Energy (-3.4%) was the only meaningful detractor as the recent strong rally in oil prices started to plateau.

Outside of the US, most sectors were negative with only Health Care (+0.1%) posting a small gain and Technology essentially flat (-0.0%). Materials (-3.3%) and Financials (-3.0%) led decliners. At the country level, the emerging market crisis was most visible in Turkey (-29.3%), Argentina (-22.2%), Brazil (-11.6%), and South Africa (-10.6%) as each of those markets contended with significant currency declines and investor flight.

Market volatility remained very low as realized and implied volatility measures stayed rooted at the low end of their historical ranges. Trade volumes rebounded from the prior month but were still meaningfully lower than normal. At the factor level, Value, Yield, and Stability were very negative while Momentum and Smaller Size posted modestly positive results. Equal-weighted portfolios underperformed market-cap weighted portfolios again as market leadership continued to be somewhat narrow.

Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist

July saw strong performance across most equity markets as concerns over the negative impact of trade wars subsided temporarily. The Russell 3000 Index finished the month with a return of +3.3%. Large cap stocks returned to the fore with the Russell 1000 Index returning +3.5% versus the Russell 2000 Index returning +1.7%. A pause in the rise of the US dollar was helpful to non-US market returns. The developed market MSCI World ex USA Index returned +2.5%, and the developing market MSCI Emerging Markets Index returned +2.2%. Fixed income markets were muted with the Bloomberg Barclays US Aggregate returning +0.0%.

At the Sector level in the US, Producer Durables (+6.1%) and Health Care (+5.9%) were the top performing sectors for the month. Materials (+3.6%), Consumer Staples (+3.5%), and Financials (+3.4%) were also strong performers. While all sectors were positive, Energy (+1.1%) and Consumer Discretionary (+1.1%) were relative laggards.

Outside of the US, Health Care (+4.5%), Utilities (+3.8%), and Financials (+3.5%) led. As in the US, all sectors were positive but Consumer Discretionary (+0.2%) and Technology (+0.5%) were only modestly so. At the country level, emerging markets again dominated the top and bottom performers. Brazil (+11.7%) and Poland (+11.5%) led while Turkey (-7.4%) and China (-2.1%) lagged.

Market volatility remained low as realized and implied volatility measures stayed at the low end of their historical ranges. Trade volumes fell off substantially as many investors remained on the sidelines in the wake of trade and economic uncertainty. At the factor level, Value and Low Volatility were positive while Smaller Size, Quality, and Momentum were modest negatives. Equal-weighted portfolios underperformed market-cap weighted portfolios as market leadership continued to be somewhat concentrated.

Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist

Trade tensions were the major driver of many market movements during the quarter with June seeing a sharp escalation in talk and action. In addition to the steel tariffs already implemented, the US announced a further $200 billion in tariffs on Chinese imports were under consideration as well as a potential 20% – 25% levy on European auto shipments. These were met with corresponding measures from the affected counterparties. The initial impact served to weaken overseas markets more with the fallout on US markets muted so far. Central bank policies continued to diverge with the US on course for a bit more incremental tightening while the ECB and the BOJ remained more accommodating. Political uncertainty in Europe and the unpredictable nature of the US administration did not help matters. Oil prices passed $70/barrel, and the US yield curve continued to flatten. Despite this “wall of worry”, investors in US assets appeared fairly sanguine and somewhat risk-seeking rather than risk-averse.

After a mixed start to the year, US markets bounced back to post robust results for the second quarter. The Russell 3000 Index finished the quarter with a return of +3.9%. Small cap stocks were dramatically better with the Russell 2000 Index returning +7.8% versus the Russell 1000 Index returning +3.6%. Returns outside of the US were much weaker as trade concerns and a stronger US dollar weighed on results. The developed market MSCI World ex USA Index returned -0.8%, and the developing market MSCI Emerging Markets Index returned -8.0%. Fixed income markets were relatively quiet with the Bloomberg Barclays US Aggregate returning -0.2%.

In the US at the Sector level, Energy (+13.5%) was the standout sector for the quarter as oil prices rebounded on supply concerns. Returns in Consumer Discretionary (+7.0%) and Technology (+6.2%) were also strongly positive. The more defensive sectors of Consumer Staples (-2.4%) and Producer Durables (-1.8%) were the only negative performers.

Outside of the US, Energy (+7.0%) also led, but most other sectors were negative with Financial Services (-5.2%), Technology (-4.0%), and Utilities (-3.7%) leading decliners. At the country level, the best performers were some of the smaller markets like Argentina (+10.0%), Luxembourg (+6.8%), and Qatar (+6.0%). However, the negative returns in various emerging markets such as Brazil (-28.6%) and Turkey (-24.4%) were much more significant.

Market volatility continued to decline from the more elevated levels of the beginning of the year. Trade volumes increased incrementally but remained well below historical averages. At the factor level, Value was again strongly negative as was Defensive and Low Volatility. Smaller Size and Quality were positive. An equal-weighted portfolio modestly outperformed the market-cap weighted portfolio as market breadth expanded slightly.

Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist

After a brief pause in April, global market performance was mixed in May as investor enthusiasm returned to the US markets while results were more negative outside of the US.  The Russell 3000 Index finished the month with a return of +2.8%.  Small cap stocks once again led the charge with the Russell 2000 Index returning +6.1% versus the Russell 1000 Index returning +2.6%.  The developed market MSCI World ex USA Index returned -1.9%, and the developing market MSCI Emerging Markets Index returned -3.5%.  A rebound in USD was a meaningful drag on non-US returns for US investors.  A retreat in interest rates helped fixed income markets with the Bloomberg Barclays US Aggregate returning +0.7%.

In the US at the Sector level, Technology (+7.4%) was the top performing sector with Energy (+3.2%) and Producer Durables (+3.2%) also strongly positive.  The yield-oriented sectors of Consumer Staples (-1.5%) and Utilities (-1.5%) continued their months-long underperformance as expectations of higher yields in fixed income siphoned off demand.

Outside of the US, growth and trade concerns weighed on the broader market with Utilities (-5.8%) and Financials (-5.2%) bearing the brunt of negative sentiment.  Health Care (+1.2%) was the lone positive sector for the month.  At the country level, the worst performers for the month were emerging markets such as Greece (-18.4%), Brazil (-16.6%), and Hungary (-14.0%).  As was the case last month, the best performers were among some of the smaller markets such as Israel (+7.4%) and Luxembourg (+4.1%).

Market volatility continued to decline from the more elevated levels of the beginning of the year.  Trade volumes increased incrementally but remained well below historical averages.  At the factor level, Value was strongly negative while Smaller Size and Quality were positive.  Equal-weighted portfolios underperformed market-cap weighted portfolio as market performance narrowed again.

Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist

Following the meaningful volatility of the prior quarter, markets were relatively muted in April.  The Russell 3000 Index finished the month with a return of +0.4%.  Small cap stocks led for the second month with the Russell 2000 Index returning +0.9% versus the Russell 1000 Index returning +0.3%.  Returns were somewhat mixed outside of the US despite recent USD strength.  The developed market MSCI World ex USA Index returned +2.3%, and the developing market MSCI Emerging Markets Index returned -0.4%.  Rising interest rates and concerns over inflation put modest pressure on most segments of the fixed income market with the Bloomberg Barclays US Aggregate returning -0.8%.

In the US at the sector level, Energy (+9.5%) was the standout sector for the second consecutive month as oil prices rebounded from February’s interim trough to approach levels last seen during the dramatic decline of late 2014.  The threat of trade tariffs and high interest rates continued to weigh on defensive/cyclical sectors such as Consumer Staples (-5.0%) and Producer Durables (-2.5%).

Outside of the US, Energy (+6.7%) was the standout sector as well with Utilities (+3.0%), Materials (+2.4%), and Consumer Discretionary (+2.3%) also additive.  In a broadly positive month, Technology (-1.0%) was the only negative performer as valuation concerns drove a reversal of recent momentum.  At the country level, some smaller markets were the best performers as Greece (+19.3%), Colombia (+7.8%), and Luxembourg (+6.6%) led.  Alternatively, geopolitical concerns weighed on Turkey (-10.6%) and Russia (-7.8%).

Market volatility declined from recent elevated levels but remained above the soporific state of the prior year.  Trade volumes also declined and remained well below historical averages.  At the factor level, most measures were fairly subdued.  Smaller Size was an incremental positive while Stability and Low Volatility were slight negatives.  Equal-weighted portfolios outperformed market-cap weighted portfolios as market performance broadened out.