October 2018

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

October was host to a broad-based market decline as concerns over trade and uncertainty around the outcome of the impending US mid-term elections caused investors to reassess their positioning. The Russell 3000 Index finished the month with a return of -7.4%. Smaller cap stocks and growth-oriented names bore the brunt of the risk-off sentiment. The small cap Russell 2000 Index returned -10.9% versus the large cap Russell 1000 Index’s return of -7.1%. Equity markets were overwhelmingly negative around the world and few safe havens could be found. The developed market MSCI World ex USA Index returned -8.0%, and the developing market MSCI Emerging Markets Index returned -8.7%. The US dollar rallied in the month, adding to the negative returns for US investors. Fixed income markets were modestly negative as yields increased incrementally. The Bloomberg Barclays US Aggregate returned -0.8%.

At the Sector level in the US, Energy (-12.0%) was the worst sector as oil prices began a precipitous drop from recent highs of mid-$70s/barrel. Materials (-11.1%) and Producer Durables (-10.8%) were also significant decliners. Defensive areas such as Consumer Staples (+1.4%) and Utilities (-0.1%) were spared in the drawdown.

Outside of the US, all sectors were negative with the formerly high-flying Technology sector (-11.9%) pacing the decliners. Results in Materials (-10.0%), Producer Durables (-9.9%), and Consumer Discretionary (-9.6%) were also meaningfully negative. At the country level, almost all countries were negative with emerging markets once again the most notable markets. Mexico (-17.2%) and South Korea (-14.4%) were on one end, and Brazil (+18.8%) was on the other.

Market volatility spiked up as realized and implied volatility measures hit near-term peaks. Trade volumes were also higher but, highlighting the extended soporific state of the markets, only managed to reach their historical averages. At the factor level, Smaller Size was very negative while exposure to Momentum also detracted. Stability, Value, Yield, and Low Volatility – all defensive in nature – posted decently positive results. Equal-weighted portfolios underperformed market-cap weighted portfolios given the drag of smaller size.