Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist
What a difference a quarter makes! Despite a rash of historically bad economic data points and the generally unabated spread of the COVID-19 virus, investors seized upon *any* indication that things were not *that* bad to get their risk on. Unemployment remained in the teens and infection counts headed into the millions, but the equity markets posted some of the fastest recoveries ever seen. By the end of the quarter, US large cap growth stocks and the tech-heavy NASDAQ composite had more than recovered all of their losses, going on to post new record highs. Many notable investors had to concede that they had been too bearish, with retail investors (and all those new Robinhood accounts) getting to enjoy a fair bit of schadenfreude.
The Russell 3000 Index finished the quarter with a return of +22.0%, recovering a significant amount of the prior quarter’s losses. Small cap stocks finally saw some outperformance in the rebound as the Russell 1000 Index returned +21.8% while the Russell 2000 Index returned +25.4%. International markets were also strongly positive but lagged the US markets, despite some modest USD weakness. The developed market MSCI World ex USA Index returned +15.3% while the developing market MSCI Emerging Markets Index returned +18.1%. With extensive support from the US Fed, credit-sensitive fixed income markets also posted solid returns, while long US Treasuries took a breather from the incredible rally of the prior quarter. The Bloomberg Barclays US Aggregate Index returned +2.9%. Performance in non-US fixed income was a bit stronger with the Global Aggregate Index returning +3.4% and the JPM EM Bond Index returning +12.3%.
At the Sector level in US equities, the rebound was led by the economically-sensitive areas of Consumer Discretionary (+37.5%) and Energy (+32.8%) and the always in favor area of Technology (+31.8%). It was a broad-based rally with all sectors posting positive returns for the quarter as enthusiasm was in great abundance. The defensive sectors of Utilities (+2.4%) and Consumer Staples (+8.9%) were relative laggards in the rally, having held up better in the decline. Outside of the US, Materials (+27.1%) and Technology (+26.7%) were the best performing sectors while Real Estate (+9.0%) and Energy (+10.5%) lagged. As in the US, all sectors posted positive returns, but the spread in performance of the best and worst sectors was only half as wide.
All country equity markets posted positive aggregate returns in the quarter. Argentina (+35.2%) and Australia (+31.8%) were the best performers, but nineteen markets posted better than 20% returns. While still respectable, results in Qatar (+8.5%), the UK (+8.9%), and Hong Kong (+9.6%) were more modest.
Within core US fixed income markets, performance was strongest in the spread sectors with Corporate Investment Grade (+9.0%) leading the way. Securitized sectors also did well with CMBS (+4.0%) and ABS (+3.5%) outperforming the broader market. Treasury (+0.5%) and MBS (+0.7%) returns were more modest given limited movement in interest rates during the quarter. Outside of the core sectors, US High Yield (+9.6%) and Leveraged Loans (+9.7%) posted strong recoveries from the sharp declines and market dysfunctions of the prior quarter. Emerging market debt also benefited from robust sentiment with Corporates (+11.2%) and Governments (+9.8%) both performing well.
Market volatility, which had spiked in February and March, declined but remained at levels which were higher than the historical averages. Trade volumes continued to be elevated and market breadth was significantly positive. At the factor level, Smaller Size was finally positive with Quality and Momentum also additive exposures. Value and Stability were significantly negative, with Value continuing a dismal run of underperformance in both up and down markets. Market leadership broadened out a bit, leading equal-weighted portfolios to outperform market-cap weighted portfolios.