Kai W. Hong, CFA
Managing Director & Chief Investment Strategist
At the start of the quarter, although there were few meaningfully positive developments in the markets, the lack of “bad” news was enough to give buyers confidence that the recent sharp declines in the market were overdone. Economic data was mixed, and most growth forecast revisions continued to be down with the IMF lowering its forecast for global growth from 3.3% to 3.1% on weakness in emerging markets. At the corporate level, M&A activity remained robust with 2015 on track for a record. By the time the calendar rolled into November, the momentum from the market rally of the prior month was already tapering off. Fed comments pointed strongly towards a mid-December increase in interest rates which served to further dampen risk appetites. A terrorist attack in Paris mid-month shook the geopolitical status quo, but it was unclear what, if any, significant changes in approach that would drive. Volatility continued into December with the Fed’s somewhat controversial decision to raise rates ending an unprecedented period of monetary stimulus. Weak data and financial market volatility in China remained on investors’ minds as events highlighted the limits of the Chinese government’s control of the equity markets. On the commodity-side, oil prices resumed their descent from an intermediate plateau of $45/barrel towards the mid-$30s/barrel, making the Energy sector the worst performing segment of the market (by far) for the second year in a row. Turmoil in the high-yield bond market, driven by a liquidity crisis at a mutual fund, added to investor disquiet.
For the quarter, the US broad market Russell 3000 Index finished at +6.3% with essentially all of the positive return coming in October. US small cap stocks continued their underperformance for the year as the Russell 2000 Index returned +3.6%. Outside of the US, developed markets were only modestly ahead with the MSCI World ex USA Index returning +3.9%. The +0.7% return for the MSCI EM Index was a welcome respite from an otherwise dismal year in emerging market stocks.
From a technical perspective, daily price volatility was fairly muted in October and November before jumping up in December. Implied volatility as measured by the VIX Index moved sporadically upwards but still finished the year below its long-term average. Average volumes traded remained below average, and short-interest declined modestly. At the factor level, Stability and Low Volatility were once again outperformers while smaller Size and Value were distinctly negative. Momentum and Low Beta were neutral. At the Sector level, Health Care and Technology led while Energy and Utilities lagged.