Research & Insights

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

Markets started the month of August modestly as Argentina’s default and the rescue of Portuguese bank Banco Espirito Santo raised investor anxiety.  Economic news was weak with the US unemployment rate edging up slightly and data disappointing in both China and Europe.  Tensions in Ukraine remained elevated, and the conflict in Iraq intensified.  However, as in many recent rallies, central bank accommodation fueled a mid-month recovery as the ECB moved closer to quantitative easing.  As the month progressed, the softening of some geopolitical tensions helped to sustain the rally.  Meanwhile at the Fed’s annual Jackson Hole meeting, central bankers worldwide generally affirmed the appropriateness of easy monetary policy given current economic conditions.  Despite some concerns as to the timing of rate increases in the US, it’s safe to say that the liquidity punchbowl remains well stocked.

The US broad market Russell 3000 Index finished the month at +4.2%.  US small cap stocks were slightly better with the Russell 2000 Index returning +5.0%.  Outside of the US, developed markets were flat with the MSCI World ex USA returning +0.1% while emerging markets continued their strong performance with the MSCI Emerging Markets Index at +2.3%

Active manager performance was mixed with the best relative performance coming from overweights to growth, momentum, and smaller size.  Factor positioning was more relevant as cross sectional volatility and overall market volatility continued to be significantly lower than historical norms.  Volume traded was also extremely low.  This mix tended to favor select growth managers while being more challenging for value and core managers.

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

Thirty days of relative calm in the markets were punctuated by a sharp sell-off on the last day of the month. Economic data was generally positive with good manufacturing data coming out of the U.S. and China, capped by a strong rebound in second-quarter US GDP to a seasonally-adjusted 4%. Deflation once again became a concern in Europe, along with the realization that the ECB will likely have to maintain its accommodating policy for much longer than its UK and US peers. The drama regarding Argentina’s overdue debt payment and concerns surrounding Portugal’s banking system slightly dampened enthusiasm. The U.S. and its Western allies imposed additional sanctions on Russia due to the ongoing Ukraine crisis, which was tragically highlighted by the downing of a Malaysian Airlines flight in the area.

Although the risk factors were somewhat mixed, active manager performance was generally positive. Smaller size and momentum were fairly negative, while defensive characteristics held up better. In a manager style context, core and value managers were more positive while growth managers, particularly those levered to high-growth stories, were more challenged.

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

The quarter began with a brief retreat as sellers focused on the turmoil in Ukraine and concerns over market valuations. In the downdrafts, biotech and momentum stocks were particularly shunned. However, by the end of May, M&A sparked a market rally, with mega cap stocks leading the way to record index highs. While macroeconomic data was mixed, volatility was low and ongoing central bank accommodation (highlighted by the ECB’s unprecedented fee on funds deposited at the bank) continued to drive return-seeking behavior.

Active manager performance was mixed as market moves decoupled somewhat from underlying fundamentals. Overall market volatility remained quite low with cross-sectional volatility and sector spreads all on the lower end of their historical ranges. On a factor basis, size (smaller), quality and momentum were fairly negative while value was neutral. In a manager style context, value managers held up reasonably well with core managers neutral, and growth managers quite challenged.

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

While the first half of May continued the choppiness seen over the last several months, M&A sparked a rally in the latter part of the month with mega cap stocks leading the way to record index highs. Economic data was mixed, with Q1 US GDP coming in at an annualized rate of -1% (due to a pause in investments and unusually disruptive winter weather) but consumer spending and factory output increased.. Markets generally shrugged off the weakness with the expectation that Q2 would prove to be more robust. On the geopolitical front, the environment was buoyed by a modest de-escalation of tensions in Ukraine and the election of a pro-growth party in India.

Active manager performance rebounded with the recovery of technology (where many growth and value managers are presently overweight) and the moderation of some style and factor differentials. Overall market volatility and stock cross-sectional volatility declined from already historically low levels. Size (smaller), value, and quality were fairly negative, but the performance of most other factors was muted. In a manager style context, there was no clear pattern to relative performance as portfolio positioning took precedence.

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

April marked the second consecutive month in which the markets struggled for direction. Buyers were buoyed by the Fed’s continuing accommodation and dovish tone regarding future interest-rate policy. Sellers focused on the turmoil in Ukraine and concerns over current market valuation. In the downdrafts, biotech and momentum stocks were particularly shunned. Economic data was mixed with strong US factory output but weaker jobs data; adding to the noise was an intensification of scrutiny of market functioning and high-frequency trading (HFT).

Active manager performance in this environment was somewhat variable. Overall market volatility and stock cross-sectional volatility continued to be at historically low levels.  Size (smaller) and momentum factors were quite negative, while value, low volatility, and stability (e.g., lower earnings variability, lower leverage) were positive. In a manager-style context, this tended to benefit core managers who, as a group, are generally larger cap and more stability/defensively oriented. Growth managers (and particularly momentum players) were especially challenged.

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

Following the dramatic run-up in most equity markets in 2013, the directionless nature of trading early on was to be expected. Macro weakness in China and some earnings disappointments triggered a sharp sell-off in the markets at the end of January, but expectations for better economic growth and a “clean” suspension of the US debt limit for a year gave further impetus to buying for most of February. Political turmoil in Italy, Turkey, and (more bloodily) Ukraine only served to dampen enthusiasm slightly. In early March, sentiment turned sharply on the Health Care (Biotech) and Technology names that had been leading, volatility increased, and returns were choppy.