Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist
Trade tensions were the major driver of many market movements during the quarter with June seeing a sharp escalation in talk and action. In addition to the steel tariffs already implemented, the US announced a further $200 billion in tariffs on Chinese imports were under consideration as well as a potential 20% – 25% levy on European auto shipments. These were met with corresponding measures from the affected counterparties. The initial impact served to weaken overseas markets more with the fallout on US markets muted so far. Central bank policies continued to diverge with the US on course for a bit more incremental tightening while the ECB and the BOJ remained more accommodating. Political uncertainty in Europe and the unpredictable nature of the US administration did not help matters. Oil prices passed $70/barrel, and the US yield curve continued to flatten. Despite this “wall of worry”, investors in US assets appeared fairly sanguine and somewhat risk-seeking rather than risk-averse.
After a mixed start to the year, US markets bounced back to post robust results for the second quarter. The Russell 3000 Index finished the quarter with a return of +3.9%. Small cap stocks were dramatically better with the Russell 2000 Index returning +7.8% versus the Russell 1000 Index returning +3.6%. Returns outside of the US were much weaker as trade concerns and a stronger US dollar weighed on results. The developed market MSCI World ex USA Index returned -0.8%, and the developing market MSCI Emerging Markets Index returned -8.0%. Fixed income markets were relatively quiet with the Bloomberg Barclays US Aggregate returning -0.2%.
In the US at the Sector level, Energy (+13.5%) was the standout sector for the quarter as oil prices rebounded on supply concerns. Returns in Consumer Discretionary (+7.0%) and Technology (+6.2%) were also strongly positive. The more defensive sectors of Consumer Staples (-2.4%) and Producer Durables (-1.8%) were the only negative performers.
Outside of the US, Energy (+7.0%) also led, but most other sectors were negative with Financial Services (-5.2%), Technology (-4.0%), and Utilities (-3.7%) leading decliners. At the country level, the best performers were some of the smaller markets like Argentina (+10.0%), Luxembourg (+6.8%), and Qatar (+6.0%). However, the negative returns in various emerging markets such as Brazil (-28.6%) and Turkey (-24.4%) were much more significant.
Market volatility continued to decline from the more elevated levels of the beginning of the year. Trade volumes increased incrementally but remained well below historical averages. At the factor level, Value was again strongly negative as was Defensive and Low Volatility. Smaller Size and Quality were positive. An equal-weighted portfolio modestly outperformed the market-cap weighted portfolio as market breadth expanded slightly.