Kai W. Hong, CFA
Managing Director & Chief Investment Strategist
As uncertainty built around the outcome of the US presidential election, investors appeared reluctant to take significant positions and the market drifted steadily downwards. Consumer spending showed some softening, and general economic data continued to be modest. That said, Q3 US GDP was reported to have accelerated to 2.9% on improved trade and spending. Oil prices briefly passed $50/barrel as producers contemplated supply constraints but fell back on a lack of consensus for action. The British pound fell significantly during the month as investors contemplated the impacts of a “hard Brexit”. At the corporate level, M&A continued to be robust as prospects for organic growth remained challenged. After an especially divisive US presidential campaign, November 8 finally arrived and forecasters were once again proven wanting as Donald Trump shocked the establishment with his win. The initial market reaction was strongly negative as S&P futures fell over 800 points overnight and foreign markets were broadly negative. However, by the time the US markets opened the losses had been recovered. This set the stage for a strong rally in risk assets with Financial stocks being one of the top beneficiaries. Fixed income risk was meaningfully re-rated as the US 10Y yield jumped over 50 basis points during the month. Markets settled a bit in December as investors continued to assess the implications of the regime change in the US. Oil prices recovered from their recent fall on news that OPEC approved its first production cut in eight years. The US Fed raised short-term interest rates as expected at their mid-December meeting and forecasted an incrementally more aggressive path for future increases. The Dow made a run towards the psychologically significant 20,000 level at year end but fell slightly short of the mark.
For the quarter, the US broad market Russell 3000 Index finished at +4.2% with a robust market rally post-election reversing the declines from October. US small cap stocks continued their outperformance for a third straight quarter as the Russell 2000 Index returned +8.8%. Outside of the US, performance in developed markets was much more muted with the MSCI World ex USA Index returning -0.4%. Concerns regarding the potentially protectionist tendencies of the new US administration weighed on developing markets as the MSCI Emerging Markets Index returned -4.2%, mostly due to currency weakness.
After a brief rise in October, the rest of the quarter saw volatility measures fall back towards the lower end of their range for the year. With the exception of some repositioning trades in November, average volumes traded were also near their lowest levels of the year. At the factor level, Value was strongly positive with Smaller size also favored. Stability, Momentum, and Low Volatility all lagged while Yield as a factor was largely neutral. At the sector level, Financials trounced all other sectors while Health Care and Consumer Staples were the only negative performers.