Kai W. Hong, CFA
Managing Director & Chief Investment Strategist
Early in the quarter, the absence of any significant macro news saw the performance of markets appear to reflect relative assessments over absolute fundamentals. Of note was the continuation of the recovery in the price of oil from its March lows to an intermediate plateau of $60/barrel. Economic news was somewhat mixed (capped by a negative reading for Q1 US GDP), but a standoff between Greece and its international creditors – marked by oddly different assessments from the negotiators of where the negotiations stood – re-emerged as a source of global macro uncertainty. The major policy discussion was still the timing of Fed “lift-off” as a strengthening US labor market came against the backdrop of muted inflation data and lower growth expectations. Interestingly, external parties such as the IMF and World Bank have been quite vocal in their calls for a delay. Volatility returned towards the end of the quarter as a dramatic collapse in the Chinese equity market was met with heavy (and somewhat ineffective) government interventions and default, bank closures, and the announcement of an economic referendum threw the Greek debt crisis into uncharted territory. With valuations for many asset classes at fair or full levels and the end of central bank accommodation becoming incrementally more real than academic, it feels that we are in a period of unstable equilibrium which is resulting in increased market volatility. Despite the S&P 500 Index reaching a record high in mid-May, the markets were mostly somewhat range-bound as most periods of rally or decline were met with quick reversals. The US broad market Russell 3000 Index finished the quarter up a modest +0.1% as gains in April and May were largely offset by June’s declines. US small cap stocks were marginally better as the Russell 2000 Index returned +0.4%. Outside of the US, developed markets were generally in line with the MSCI World ex USA Index returning +0.5% while emerging market stocks as represented by the MSCI EM Index were slightly stronger at +0.7%. Performance for active managers was mixed during the quarter with those in large cap faring better than their peers in the small cap. A fair amount of the discrepancy could be attributed to the significant contribution of Health Care to index performance and the general lack of exposure to small cap biotechs among small cap managers. While cross-sectional volatility remained meaningfully below historical averages, price volatility increased in June on both a realized and implied (VIX) basis. At the factor level, Stability and Low Volatility were both underperformers as was Momentum. Smaller size was incrementally positive while Value was incrementally negative. This interplay may be somewhat indicative of a narrow market with one dominant sector (Health Care) bucking the trend.