Kai W. Hong, CFA
Managing Director & Chief Investment Strategist
Starting the quarter, October looked like a perfectly reasonable recovery from the declines of the prior month. However, end-point results masked significant intra-month volatility as the markets swung from bearishness to bullishness in the blink of an eye. Macroeconomic concerns in Europe and China gave the bears reasons to sell mid-month, but better US data and strong US company earnings reports reignited the rally. November saw a consolidation of the market rally, and most days saw steady if unspectacular gains. The most meaningful macro story of the quarter was the acceleration of the collapse in the price of oil which had started in earnest in July. By the end of the quarter, the price of oil was down close to 50%. Bears saw the decline as a reflection of weaker global growth, but Bulls focused on the on-going accommodative stance of the Fed (despite the end of the latest round of QE). Volatility increased and the quarter (and year) ended on an uncertain note.
The US broad market Russell 3000 Index finished the quarter up +5.2%. US small cap stocks staged a strong recovery from the underperformance of the past 12 months with the Russell 2000 Index returning +9.7%. Outside of the US, developed markets were again negative with the MSCI World ex USA Index returning -3.7% while emerging market stocks as represented by the MSCI EM Index were worse at -4.5%.
Performance for active managers was mixed during the quarter. While overall market volatility did increase, cross-sectional volatility remained near historical lows. On a factor basis, small size was significantly positive as were the defensive characteristics of stability and low volatility. Value and quality were largely neutral, and momentum was slightly negative. Of note, any type of Energy overweight was a major detractor as the sector underperformed the broader market by close to 20%. From a manager style perspective, defensively-oriented managers held up best while performance of most small cap managers was challenged regardless of style.