Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist

April began with an air of collective uncertainty settling over the markets. However, that uncertainty had an oddly sedating effect as news which in the past would have elicited a reaction by investors (e.g. a US missile strike on Syria) was generally shrugged off. Volatility reached unusually low levels which gave rise to an overall sense of complacency despite a myriad of potential shocks in the background. Company earnings and M&A activity were robust, but expectations and valuations were at such levels that company financial misses were typically met with dramatically negative price action. Markets were largely trendless for much of the quarter as political uncertainty once again dominated headlines with the French presidential election (subsequently won by centrist Macron vs far-right Le Pen) and the unexpected firing of the FBI director in the US overshadowing most other news. Even events such as a terrorist attack in the UK, the US administration’s withdrawal from the Paris climate accord, as well as a setback for the ruling Conservatives in the UK failed to elicit much of a sustained reaction from investors. Economic performance was mixed with the Eurozone showing stronger results than the US and evidence of a cooling down coming from China. Although wage growth remained modest and inflation was subdued, confidence in the overall economy led the US Fed to continue tightening monetary policy in June after a pause in May. In emerging markets, the addition of Chinese A-shares listed in Shanghai and Shenzhen to the MSCI Emerging Markets Index was notable more on a symbolic rather than practical level since the change will not start until mid-2018 and will only represent 0.7% of the overall index.

For the quarter, the US broad market Russell 3000 Index finished at +3.0% with the market rally continuing but with a slightly less robust upward trajectory. That said, new highs were approached, and overall investor mood seemed sanguine. Returns in US small cap stocks once again lagged their large cap counterparts as the Russell 2000 Index returned +2.5%. Outside of the US, performance in developed markets outpaced the US with the MSCI World ex USA Index returning +5.6%, helped by the continued decline of the trade-weighted US dollar. Performance in developing markets was even stronger with the MSCI Emerging Markets Index returning +6.3%, increasing its advantage over developed markets to almost 6% on a year-to-date basis.

Market volatility was once again quite low as nothing seemed to faze investors and traders. Trade volumes picked ups towards the end of the quarter but remained below long-term historical averages. At the factor level, the quarter continued to see a strong reversal of trends from the prior year as Value and Smaller size were both negative. As with Q1, other factors such as Stability, Momentum, and Low Volatility continued to lag with Quality being the only notable positive factor. Notably, equal-weighted portfolios generally underperformed market-cap weighted portfolios, highlighting the outsized contribution a few larger cap Technology names had on index performance early in the quarter. At the sector level, Health Care, Producer Durables, and Technology led while Energy and Utilities were the only negative performers for the period.