Research & Insights

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

While the last few days of June saw a large dose of Brexit-induced volatility, the market recovery was well on its way by the start of July as many of the consequences investors feared failed to materialize. There will be meaningful impacts from the coming change, but the scope and magnitude of those will only become clearer in the months and years ahead. While broad global macroeconomic metrics continued to be mixed, the US remained a relative bright spot with a strong rebound in US job growth, an accommodating US Fed, and good company earnings pacing the markets upwards. However on the risk-side, US consumer sentiment and spending were seeing some softening, corporations were stockpiling cash, valuations in many markets continued to be elevated, and expectations for an interest-rate increase in the US before year-end grew. August was a period of relative calm as competing macro considerations left investors wondering how to position portfolios. Volatility and trading volumes were unusually low, and there appeared to be few catalysts to drive either bullish or bearish sentiment. Q2 US GDP came in at a modest 1.2% as robust consumer spending was offset by retrenchment in business investment. This followed a downwardly revised Q1 GDP reading of 0.8%. While this made the possibility of near-term tightening by the US Fed less likely, growing support within the Fed for a rate increase combined with declining forward growth expectations and elevated valuations served to restrain broad-based buying. In the absence of any notable catalysts, ongoing anxiety regarding potential monetary policy tightening drove a brief swoon in the markets prior to the Fed’s mid-September meeting. The meeting ended up being one of the more contentious in recent memory with three Fed members dissenting from the decision to keep rates on hold. Interpretations of the comments from the meeting pointed to a probable rate increase in December. Political uncertainty in the US added to investor unease as polls tightened and the exchanges between the campaigns became more heated.

For the quarter, the US broad market Russell 3000 Index finished at +4.4%, primarily on the strength of a robust July. US small cap stocks were dramatically better as the Russell 2000 Index returned +9.1%. Outside of the US, developed markets shrugged off the Brexit concerns from Q2 with the MSCI World ex USA Index returning +6.3%. Momentum in developing markets continued as the MSCI Emerging Markets Index returned +9.0%.

Volatility for the quarter was lowest during the robust July period and steadily increased into a largely range-bound August and September. However, both daily price volatility and implied volatility remained at the lower end of their ranges for the last twelve months. Average volumes traded continued to decline from their levels of Q1. At the factor level, Smaller size was strongly positive with Quality also favored. The former market leaders of Stability, Low Volatility, and Yield all lagged as did Momentum. Value as a factor was largely neutral. At the sector level, Technology was a strong outperformer while Utilities and Consumer Staples lagged meaningfully.

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

August was a period of relative calm as competing macro considerations left investors wondering how to position portfolios.  Volatility and trading volumes were unusually low, and there appeared to be few catalysts to drive either bullish or bearish sentiment.  Q2 US GDP came in at a modest 1.2% as robust consumer spending was offset by retrenchment in business investment.  This followed a downwardly revised Q1 GDP reading of 0.8%.  While this made the possibility of near-term tightening by the US Fed less likely, growing support within the Fed for a rate increase combined with declining forward growth expectations and elevated valuations served to restrain broad-based buying.  Concerns over Brexit continued to recede into the background as most observers expected the impacts of the move to be modest in the short-term.  On the positive side, US job creation remained strong, and hourly wages rose.

Although many US market indexes were able to post record highs during the month, market performance overall was fairly muted with the Russell 3000 Index finishing at +0.3%.  Notably, there were no days during the month when the index was up or down by more than 1%.  At the sector level, Financials and Technology led while Utilities and Health Care lagged.  US small cap stocks continued their recent leadership as the Russell 2000 Index returned +1.8%.  Outside of the US, market performance was mixed.  The developed market MSCI World ex USA Index returned +0.1% while the developing market MSCI Emerging Markets Index returned +2.5%.

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

While the last few days of June saw a large dose of Brexit-induced volatility, the market recovery was well on its way by the start of July as many of the consequences investors feared failed to materialize. That said, there was dislocation among UK property funds as several were frozen in response to a dramatic increase in withdrawals. There will be meaningful impacts from the coming change, but the scope and magnitude of those will only become clearer in the months and years ahead. While broad global macroeconomic metrics continued to be mixed, the US remained a relative bright spot with a strong rebound in US job growth, an accommodating US Fed, and good company earnings pacing the markets upwards. In a sign of the sanguine mood of investors, an attempted coup in Turkey mid-month saw very little reaction in the broad financial markets. However on the risk-side, US consumer sentiment and spending were seeing some softening, corporations were stockpiling cash, valuations in many markets continued to be elevated, and expectations for an interest-rate increase in the US before year-end grew.

The strong rally at the beginning of the month eventually leveled out, but the Russell 3000 Index finished quite well at +4.0%. At the sector level, Technology rebounded strongly from the declines of the prior month to lead while the defensive sectors of Energy, Utilities, and Staples lagged. US small cap stocks led all capitalization buckets as the Russell 2000 Index returned +6.0%. Outside of the US, market performance was equally positive. The developed market MSCI World ex USA Index returned +4.9% while the developing market MSCI Emerging Markets Index returned +5.0%.

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

At the start of the quarter, there were a number of macro events for investors to assess (e.g. the Panama Papers leak, an impeachment in Brazil, possible Brexit, energy company bankruptcies), but overall volatility was fairly low. Reinforcing the ongoing importance of central bank liquidity, weak growth was seen as a positive by the markets as it meant that the Fed and others would likely stay accommodating for longer. Oil prices reached their highest level of the year on increased gasoline demand and declining US inventories. Corporate earnings were mixed with Wall Street banks showing meaningful declines and Apple reporting its first quarterly revenue decline in 13 years. In a period of limited major macro news, investors fixated mostly on the likelihood of a Fed rate increase in the coming months. Economic data was generally weak as Japan and China both struggled to reposition towards organic growth, Europe (while improving) still faced structural impediments to action, and the US grappled with the limits of monetary stimulus. US employment, which had been a strong datapoint for a while, came in surprisingly weak, most likely delaying the next Fed rate increase. Corporate M&A continued to be robust but further served to highlight how little organic growth there was available to be had. The end of the quarter brought the culmination of the British referendum on EU membership (i.e. Brexit). Uncertainty increased as the referendum approached (June 23), but the final result of a win for “Leave” still stunned markets with the Pound falling to a 30 year low and many equity markets suffering significant losses in the two days following. However, the market declines were almost immediately recouped as the immediate fallout was contained, and market liquidity and function were largely normal.

For the quarter, the US broad market Russell 3000 Index finished at +2.6% as a strong rally in the last few days halted the negative momentum a win for Brexit had unleashed. US small cap stocks were able to do better as the Russell 2000 Index returned +3.8%. Outside of the US, developed markets were impacted more by Brexit, and the MSCI World ex USA Index returned -1.1%. Cheaper valuations and more modest exposure to the UK allowed developing markets to modestly outperform as the MSCI EM Index returned +0.7%.

Despite all the market action intra-quarter, volatility was fairly muted. Both daily price volatility and implied volatility were on the lower end of their ranges for the last twelve months. Average volumes traded declined from the elevated levels of Q1. At the factor level, Value, Stability, and Smaller size were all strongly positive while Quality and Momentum lagged. At the sector level, Energy, Utilities, and Health Care led while Technology and Consumer Discretionary were the only negative performers for the quarter.

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

In a period of limited major macro news, investors fixated mostly on the likelihood of a Fed rate increase in the coming months. Economic data was generally weak as Japan and China both struggled to reposition towards organic growth, Europe (while improving) still faced structural impediments to action, and the US grappled with the limits of monetary stimulus. US employment, which had been a strong datapoint for a while, came in surprisingly weak, most likely delaying the next Fed rate increase. While market valuations in emerging markets were more reasonable, they had a number of structural problems of their own with the headline event of Brazilian President Rousseff’s impeachment a reminder of the incremental risks in those markets. Hanging over all of this was the shift in the outlook for “Brexit” from unlikely to too-close-to-call. Corporate M&A continued to be robust but further served to highlight how little organic growth there was available to be had. That said, strengthening oil prices in the latter half of the month helped pace a modest market rally.

Initial declines in the markets were reversed mid-month, and the Russell 3000 Index finished at +1.8%. Sector spreads were significantly tighter than the prior month. Technology was the standout with all other sectors falling in a range of -2% to +2%. Once again, US small cap stocks did a little better as the Russell 2000 Index returned +2.3%. Outside of the US, market performance was softer, partially impacted by a 3% rally in the USD. The developed market MSCI World ex USA Index returned -1.1% while the developing market MSCI Emerging Markets Index returned -3.7%.

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

While there were a number of macro events for investors to assess (e.g. the Panama Papers leak, an impeachment in Brazil, Brexit, energy company bankruptcies), overall volatility was fairly low. In the US, some industrial indicators were weaker than expected which led to some concerns regarding a potential recession, but labor market measures remained generally positive. Reinforcing the ongoing importance of central bank liquidity, weak growth was seen as a positive by the markets as it meant that the Fed and others would likely stay accommodating for longer. The IMF continued to press for more coordinated action on the part of governments to combat persistent low growth, calls that for the most part seem unlikely to be heeded. Oil prices reached their highest level of the year on increased gasoline demand and declining US inventories. Corporate earnings were mixed with Wall Street banks showing meaningful declines and Apple reporting its first quarterly revenue decline in 13 years.

Following the dramatic moves of the prior three months, markets were somewhat range-bound in April. The Russell 3000 Index finished the month slightly positive at +0.6%. While overall returns were somewhat muted, the spread between the top and bottom performing sectors was greater than it has been over the last twelve months. Energy and Materials sectors led the way with Technology as the main underperformer. US small cap stocks did a bit better as the Russell 2000 Index returned +1.6%. Outside of the US, markets were generally positive with US investor returns benefiting from weakness in the USD. The developed market MSCI World ex USA Index returned +3.2% while the developing market MSCI Emerging Markets Index returned +0.5%.

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

The momentum from the strong rally in October had already begun to weaken in December, but the decline in markets that started the year was truly breathtaking. By the third week in January, major market indexes were down around 10% or more as concerns grew over weakening economic data from China and concerns that declining oil prices signaled broader global weakness. Some of the momentum leaders of the prior year (AMZN, NFLX) became significant laggards, falling twice as much as the broader market. Ineffectual market interventions by the Chinese government further undermined confidence. Economic data out of China continued to be weak, and oil prices fell below $30/barrel. Earnings at financial firms were challenged, and questions arose regarding the valuations of a number of public and private technology companies. While global market volatility was high, the US economy continued to trudge along. A rebound in the price of oil mid-February appeared to ease some investor fears, igniting a market rally as some investors saw the selling as overdone. Against the uncertain backdrop, many central banks, including the US Fed, maintained a more accommodating stance, and the trajectory of future rate increases began to look more shallow despite an improving employment picture. This accommodation further fueled the rally, just as it has in many points throughout this seven year bull market.

For the quarter, the US broad market Russell 3000 Index finished at +1.0% as a strong rally in the second half of the period offset the significant declines from the first half. US small cap stocks continued to lag their larger cap counterparts as the Russell 2000 Index returned -1.5%. Outside of the US, developed markets were modestly behind with the MSCI World ex USA Index returning -2.0% while developing markets finally showed some signs of life as the MSCI EM Index returned +5.7%.

Volatility was fairly high early in the quarter before falling significantly in the market rally of March. Daily price volatility was at the higher end of the range of the last twelve months. Implied volatility as measured by the VIX Index was slightly above its long-term average. Average volume traded was at the highest level in at least a year while a decline in short-interest also helped the late quarter rally. At the factor level, Stability and Value were fairly positive. Smaller size and Momentum lagged. At the Sector level, Utilities and Materials led while Health Care and Financial Services lagged.

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

Despite a modest recovery at the end of January, markets began the month of February with renewed discomfort. Economic data out of China continued to be weak, and oil prices fell back below $30/barrel. Earnings at financial firms were challenged, and questions arose regarding the valuations of a number of public and private technology companies. Against the uncertain backdrop, many central banks, including the US Fed, maintained a more accommodating stance, and the trajectory of future rate increases began to look more shallow despite an improving employment picture. A rebound in the price of oil mid-month appeared to ease some investor fears, and markets rallied modestly into the end of the month.

While there was quite a bit of intra-month volatility, the broad markets ended February largely flat. The Russell 3000 Index finished the month at -0.0% as Materials and Producer Durables led and Energy, Technology, and Financials lagged. US small cap stocks were also flat as the Russell 2000 Index returned +0.0%. Outside of the US, performance was similarly muted. The developed market MSCI World ex USA Index returned -1.4%, and the developing market MSCI Emerging Markets Index returned -0.2%.

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

The momentum from the strong rally in October had already begun to weaken in December, but the decline in markets that started the year was truly breathtaking. By the third week in January, major market indexes were down around 10% or more as concerns grew over weakening economic data from China and concerns that declining oil prices signaled broader global weakness. In fact, oil prices fell below $30 a barrel for the first time in 12 years. Some of the momentum leaders of the prior year (AMZN, NFLX) became significant laggards, falling twice as much as the broader market. Ineffectual market interventions by the Chinese government further undermined confidence. Data in the US was more negative as well with employment statistics showing mixed results, manufacturing struggling as the stronger US dollar weighed, and corporate profits showing signs of decline. Volatility could be found everywhere, and uncertainty was the norm.

While there was some recovery in prices by the end of the month, market performance in January still ended up broadly negative. The Russell 3000 Index finished the month down -5.6% with defensive sectors such as Utilities and Consumer Staples leading while Health Care, Materials, and Financials lagged significantly. US small cap stocks were meaningfully worse as the Russell 2000 Index fell -8.8%. Outside of the US, performance was similarly challenged. The developed market MSCI World ex USA Index returned -6.8%, and the developing market MSCI Emerging Markets Index returned -6.5%.