August 2018

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.