Research & Insights

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

April began with an air of collective uncertainty settling over the markets. However, that uncertainty had an oddly sedating effect as news which in the past would have elicited a reaction by investors (e.g. a US missile strike on Syria) was generally shrugged off. Volatility reached unusually low levels which gave rise to an overall sense of complacency despite a myriad of potential shocks in the background. Company earnings and M&A activity were robust, but expectations and valuations were at such levels that company financial misses were typically met with dramatically negative price action. Markets were largely trendless for much of the quarter as political uncertainty once again dominated headlines with the French presidential election (subsequently won by centrist Macron vs far-right Le Pen) and the unexpected firing of the FBI director in the US overshadowing most other news. Even events such as a terrorist attack in the UK, the US administration’s withdrawal from the Paris climate accord, as well as a setback for the ruling Conservatives in the UK failed to elicit much of a sustained reaction from investors. Economic performance was mixed with the Eurozone showing stronger results than the US and evidence of a cooling down coming from China. Although wage growth remained modest and inflation was subdued, confidence in the overall economy led the US Fed to continue tightening monetary policy in June after a pause in May. In emerging markets, the addition of Chinese A-shares listed in Shanghai and Shenzhen to the MSCI Emerging Markets Index was notable more on a symbolic rather than practical level since the change will not start until mid-2018 and will only represent 0.7% of the overall index.

For the quarter, the US broad market Russell 3000 Index finished at +3.0% with the market rally continuing but with a slightly less robust upward trajectory. That said, new highs were approached, and overall investor mood seemed sanguine. Returns in US small cap stocks once again lagged their large cap counterparts as the Russell 2000 Index returned +2.5%. Outside of the US, performance in developed markets outpaced the US with the MSCI World ex USA Index returning +5.6%, helped by the continued decline of the trade-weighted US dollar. Performance in developing markets was even stronger with the MSCI Emerging Markets Index returning +6.3%, increasing its advantage over developed markets to almost 6% on a year-to-date basis.

Market volatility was once again quite low as nothing seemed to faze investors and traders. Trade volumes picked ups towards the end of the quarter but remained below long-term historical averages. At the factor level, the quarter continued to see a strong reversal of trends from the prior year as Value and Smaller size were both negative. As with Q1, other factors such as Stability, Momentum, and Low Volatility continued to lag with Quality being the only notable positive factor. Notably, equal-weighted portfolios generally underperformed market-cap weighted portfolios, highlighting the outsized contribution a few larger cap Technology names had on index performance early in the quarter. At the sector level, Health Care, Producer Durables, and Technology led while Energy and Utilities were the only negative performers for the period.

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

Markets were largely flat for the first half of May as political uncertainty once again dominated headlines with the French presidential election (subsequently won by centrist Macron vs far-right Le Pen) and the unexpected firing of the FBI director in the US overshadowing most other news. Investor complacency has been the theme for most of the year with volatility on an actual and implied basis at the lower end of historical ranges. That said, the trend has been broadly upward sloping with several US indexes hitting record highs. As largely expected, the US Fed left the Fed Funds rate unchanged at their May meeting but signaled that a rate hike was on the table for the June. This was despite the fact that US GDP only grew at a modest 0.7% in Q1. In contrast, growth in Europe continued to strengthen which supported renewed interest among investors to gain exposure to the region. The calm was temporarily interrupted by news that President Trump might have disclosed highly classified intelligence to Russian diplomats in an Oval Office meeting. Markets sold off but quickly recovered as investors digested and eventually disregarded the events. Such was the mood that even a terrorist attack in the UK was met with little significant market reaction.

The Russell 3000 Index finished the month at +1.0%. At the sector level, Technology and Consumer Staples were the leaders for the month while Energy continued its dismal performance. US small cap stocks underperformed large caps with the Russell 2000 Index returning -2.0% on negative performance in seven out of nine sectors. Outside of the US, market performance was slightly stronger as the developed market MSCI World ex USA Index returned +3.3% while the developing market MSCI Emerging Markets Index returned +3.0%.

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

April began with an air of collective uncertainty settling over the markets. However, that uncertainty had an oddly sedating effect as news which in the past would have elicited a reaction by investors (e.g. a US missile strike on Syria) was generally shrugged off. Volatility reached unusually low levels which gave rise to an overall sense of complacency despite a myriad of potential shocks in the background from missile tests in North Korea to the rise of the National Front in the French election. Political action in the US was more noise than substance as many observers began to heavily discount the statements and posturing coming out of the administration. Company earnings and overall economic growth were positive (although modest), and M&A activity was robust. But expectations and valuations were at such levels that company financial misses were typically met with dramatically negative price action.

The Russell 3000 Index finished the month at +1.1%. At the sector level, Consumer Discretionary, Technology, and Producer Durables were leaders while Energy was the main negative performer for the month. US small cap stocks were largely in-line with large caps with the Russell 2000 Index returning +1.1% as well. Outside of the US, market performance was slightly stronger as the developed market MSCI World ex USA Index returned +2.1% while the developing market MSCI Emerging Markets Index returned +2.2%.

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

Markets began the year mostly range-bound as investors absorbed the dramatic gains of the prior months and turned their attention to the impending reality of a new US administration. News was dominated with more talk than action but the broad contours emerged of a dramatically new direction in US economic and geopolitical policy – less regulation and more domestically-focused. Macroeconomic conditions were mostly stable, and monetary policy remained generally supportive despite the US Fed’s bias towards tightening. Meanwhile, late month bullishness pushed the Dow above the 20,000 level. This market enthusiasm continued for a while as investors seemed to focus more on potential upsides to policy rather than uncertainty and downside risks. While talk of deregulation and tax reform in the US was enough to stoke markets’ animal spirits, the consolidation and persistence of these levels would likely require a fair amount of fundamental improvement with only modest room for disappointment. However, it seems that FoMO (Fear of Missing Out) could be just as strong in markets as it is in the social media context. Against that backdrop, the US Fed held off on increasing interest rates at their February meeting but spent much of the latter part of the month laying the ground work for the eventual hike in March given optimism about the US economy. Enthusiasm tempered a bit in March, as the failure of the attempt to repeal the Affordable Care Act caused investors to reassess the likelihood of success for other administration and Congressional Republican initiatives such as tax reform and infrastructure spend. Outside of the US, European leaders turned their attention to “hard Brexit” as the formal process for the UK’s exit from the European Union began while in Asia North Korean actions once again pushed to the forefront as Chinese President Xi Jinping prepared for a visit to the US.

For the quarter, the US broad market Russell 3000 Index finished at +5.7% with the market rally post-election continuing apace. Returns in US small cap stocks moderated from their leadership of the prior quarters as the Russell 2000 Index returned +2.5%. Outside of the US, performance in developed markets finally outpaced the US with the MSCI World ex USA Index returning +6.8%, supported by a near-term reversal of US dollar strength. Performance in developing markets was even stronger with the MSCI Emerging Markets Index returning +11.4%, as recent concerns subsided and valuations continued to be supportive.

Market volatility remained quite low as investors were seen to be either complacent or resilient depending on your point-of-view. Trade volumes remained modest but saw an uptick towards the end of the quarter. At the factor level, the quarter saw a strong reversal of trends from the prior year as Value and Smaller size were both fairly negative. Interestingly, other factors such as Stability, Momentum, and Low Volatility continued to lag with Quality being the only notable positive factor. At the sector level, the growth sectors of Technology, Health Care, and Consumer Discretionary led while Energy was the only negative performer for the period.

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

The market enthusiasm which pushed the Dow above the 20,000 level late last month continued unabated as investors seemed to focus more on potential upsides to policy rather than uncertainty and downside risks. While talk of deregulation and tax reform in the US was enough to stoke markets’ animal spirits, the consolidation and persistence of these levels is likely going to require a fair amount of fundamental improvement with only modest room for disappointment. However, it seems that FoMO (Fear of Missing Out) could be just as strong in markets as it is in the social media context. Against that backdrop, the US Fed held off on increasing interest rates at their February meeting but spent much of the latter part of the month laying the ground work for coming hikes given optimism about the US economy. Risk appetites in markets outside of the US wavered as people continued to try to assess the economic nationalism espoused by the new US administration and its potential impacts on trade and global growth.

The Russell 3000 Index finished the month at +3.7%. At the sector level, Health Care, Technology and Financials were leaders while Energy was the only sector down for the month. US small cap stocks were again more muted with the Russell 2000 Index returning +1.9%. Outside of the US, market performance was also positive as the developed market MSCI World ex USA Index returned +1.2% while the developing market MSCI Emerging Markets Index returned +3.1%.

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

Markets began the year mostly range-bound as investors absorbed the dramatic gains of the prior months and turned their attention to the impending reality of a new US administration. News was dominated with more talk than action but the broad contours emerged of a dramatically new direction in US economic and geopolitical policy – less regulation and more domestically-focused. In response, several companies announced initiatives in the US while others experienced the impact of tweet-induced volatility. Macroeconomic conditions were mostly stable, and monetary policy remained generally supportive despite the US Fed’s bias towards tightening. In the UK, the prime minister outlined a “hard Brexit” with a total and decisive departure from the EU. In Davos, the risks of rising inequality and the downsides of globalization were prominent topics of discussion. Meanwhile, late month bullishness pushed the Dow above the 20,000 level.

The Russell 3000 Index finished the month at +1.9%. At the sector level, Technology and Materials were leaders while Energy and Utilities lagged. US small cap stocks were more muted with the Russell 2000 Index returning +0.4%. Outside of the US, market performance was stronger, partially driven by a weakening in the US dollar which had hit a 14-year high at the start of the month. The developed market MSCI World ex USA Index returned +3.0% while the developing market MSCI Emerging Markets Index returned +5.5%.

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

As uncertainty built around the outcome of the US presidential election, investors appeared reluctant to take significant positions and the market drifted steadily downwards. Consumer spending showed some softening, and general economic data continued to be modest. That said, Q3 US GDP was reported to have accelerated to 2.9% on improved trade and spending. Oil prices briefly passed $50/barrel as producers contemplated supply constraints but fell back on a lack of consensus for action. The British pound fell significantly during the month as investors contemplated the impacts of a “hard Brexit”. At the corporate level, M&A continued to be robust as prospects for organic growth remained challenged. After an especially divisive US presidential campaign, November 8 finally arrived and forecasters were once again proven wanting as Donald Trump shocked the establishment with his win. The initial market reaction was strongly negative as S&P futures fell over 800 points overnight and foreign markets were broadly negative. However, by the time the US markets opened the losses had been recovered. This set the stage for a strong rally in risk assets with Financial stocks being one of the top beneficiaries. Fixed income risk was meaningfully re-rated as the US 10Y yield jumped over 50 basis points during the month. Markets settled a bit in December as investors continued to assess the implications of the regime change in the US. Oil prices recovered from their recent fall on news that OPEC approved its first production cut in eight years. The US Fed raised short-term interest rates as expected at their mid-December meeting and forecasted an incrementally more aggressive path for future increases. The Dow made a run towards the psychologically significant 20,000 level at year end but fell slightly short of the mark.

For the quarter, the US broad market Russell 3000 Index finished at +4.2% with a robust market rally post-election reversing the declines from October. US small cap stocks continued their outperformance for a third straight quarter as the Russell 2000 Index returned +8.8%. Outside of the US, performance in developed markets was much more muted with the MSCI World ex USA Index returning -0.4%. Concerns regarding the potentially protectionist tendencies of the new US administration weighed on developing markets as the MSCI Emerging Markets Index returned -4.2%, mostly due to currency weakness.

After a brief rise in October, the rest of the quarter saw volatility measures fall back towards the lower end of their range for the year. With the exception of some repositioning trades in November, average volumes traded were also near their lowest levels of the year. At the factor level, Value was strongly positive with Smaller size also favored. Stability, Momentum, and Low Volatility all lagged while Yield as a factor was largely neutral. At the sector level, Financials trounced all other sectors while Health Care and Consumer Staples were the only negative performers.

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

After an especially divisive US presidential campaign, November 8 finally arrived and forecasters were once again proven wanting as Donald Trump shocked the establishment with his win. The initial market reaction was strongly negative as S&P futures fell over 800 points overnight and foreign markets were broadly negative. However, by the time the US markets opened the losses had been recovered. This set the stage for a strong rally in risk assets with Financial stocks being one of the top beneficiaries. Fixed income risk was meaningfully re-rated as the US 10Y yield jumped over 50 basis points during the month. US economic performance continued to improve with Q3 GDP revised up on buoyant household spending, and Fed governors signaled an increasing likelihood for a rate increase at their upcoming December meeting. Corporate results were generally good, but many firms moderated their future outlooks. Outside of the US, Brexit continued to be a slow-moving drama with the UK and EU both taking somewhat hardline stances in the media.

The Russell 3000 Index finished the month at +4.5%. At the sector level, Financials, Producer Durables, Materials, and Energy were leaders while Consumer Staples, Utilities, and Technology lagged. US small cap stocks rallied dramatically with the Russell 2000 Index returning +11.2%. Outside of the US, market performance was negative, partially driven by a strong dollar rally. The developed market MSCI World ex USA Index returned -1.6% while the developing market MSCI Emerging Markets Index returned -4.6%.

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

As uncertainty built around the outcome of the US presidential election, investors appeared reluctant to take significant positions and the market drifted steadily downwards. Consumer spending showed some softening, and general economic data continued to be modest. Job growth was below expectations, but average hourly waged showed strong increases. That said, Q3 US GDP was reported to have accelerated to 2.9% on improved trade and spending. Given the data, the US Fed continued to lay the groundwork for a December rate increase. Oil prices briefly passed $50/barrel as producers contemplated supply constraints but fell back on a lack of consensus for action. The British pound fell significantly during the month as investors contemplated the impacts of a “hard Brexit”. The decline was also exacerbated by a lack of liquidity in the market. At the corporate level, M&A continued to be robust as prospects for organic growth remained challenged.

The Russell 3000 Index finished the month at -2.2%. At the sector level, Financials and Technology led by declining less while Health Care was a meaningfully negative. US small cap stocks reversed their recent gains with the Russell 2000 Index returning -4.8%. Outside of the US, market performance was mixed. The developed market MSCI World ex USA Index returned -1.9% while the developing market MSCI Emerging Markets Index returned +0.2%.