Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist
In a seesaw market, much of the action was driven by investor perspectives on and news from trade disputes and central bank signaling. Concerns over trade and a slowing macroeconomic growth outlook weighed on sentiment at times throughout the quarter as the impact of policy uncertainty and the tariffs enacted began to be more visible. Offsetting that was an increasingly accommodative posture from the US Fed. Although the job market remained robust, inflation stayed below targets and more of the Fed appeared to be moving towards “insurance” cuts in the face of increasing downside risks, trade and global growth large among them.
The Russell 3000 Index finished the quarter with a return of +4.1%. Large caps returned to prominence with the Russell 1000 Index up +4.3% versus the Russell 2000 Index’s +2.1%. Markets outside of the US were slightly off the pace, with large variances between countries. The developed market MSCI World ex USA Index returned +3.8% while the developing market MSCI Emerging Markets Index returned only +0.6%. Fixed income markets were beneficiaries of the fall in yields with the Bloomberg Barclays US Aggregate Index returning +3.1%.
At the Sector level in the US, Financials (+7.7%) led the way with Information Technology (+5.7%) also posting strong results. Energy (-3.8%) was the only negative sector for the quarter, but Health Care (+1.5%) and Real Estate (+1.8%) were also relative laggards. •
Outside of the US, Industrials (+5.5%) posted the best returns. Financials (+4.8%) and Information Technology (+4.3%) also posted good results. Real Estate (-1.2%) was the only negative sector here as Energy (+0.9%) held up better than its US counterpart. At the country level, Argentina (+48.3%), Greece (+19.6%), and Russia (+17.6%) were the strongest performers. Switzerland (+8.9%) and Germany (+7.8%) were the best of the developed markets. Pakistan (-20.5%) was the worst performer for the quarter while Saudi Arabia (-6.0%) got off to an inauspicious start as an emerging market. Of the major markets, China (-3.6%) was the biggest drag.
Market volatility remained largely the same as it has been, i.e. low, as liquidity and sentiment driven trading kept cross-sectional volatility relatively muted. At the factor level, Smaller Size, Yield, Quality, and Value were all negative. Stability, Low Volatility, and Momentum were incrementally in favor. An equal-weighted portfolio underperformed the market-cap weighted portfolio significantly, reinforcing the dominance of larger names in the rally.