Investment Commentary, Research and Thought Leadership

Q3 2019

Q3 2019

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

The month to month volatility seen in the second quarter continued in the third as competing narratives fought for investor mindshare.  On one hand, global growth showed more signs of a slow down with both the IMF and World Bank reducing forecasts.  US manufacturing appeared to be in recession, trade frictions between the US and China continued, and the outcome and timing of Brexit seemed cloudier than ever.  However, employment and consumer spending figures in the US remained solid and central bank accommodation improved with a second rate cut from the US Fed.  In the end, these dynamics resulted in differentiated performance across markets with the US leading again.

The Russell 3000 Index finished the quarter with a return of +1.2%.  Despite a modest reversal in September, large cap stocks continued to build on year-to-date outperformance over small cap.  The Russell 1000 Index returned +1.4% while the Russell 2000 Index returned -2.4%.  International markets continued to lag as growth and trade concerns weighed on sentiment.  The developed market MSCI World ex USA Index returned -0.9% while the developing market MSCI Emerging Markets Index returned -4.3%.  Fixed income markets continued to benefit from falling government yields with the Bloomberg Barclays US Aggregate Index returning +2.3%.

At the Sector level in the US, defensive and yield-oriented sectors such as Utilities (+8.6%), Real Estate (+7.2%), and Consumer Staples (+5.7%) led.  Energy (-7.8%) and Health Care (-3.4%) were once again laggards.  Outside of the US, Information Technology (+2.2%), Consumer Staples (+1.7%), and Health Care (+1.5%) were the leaders while Materials (-6.7%), Energy (-4.5%), and Financials (-3.5%) lagged.

At the country level, emerging countries Turkey (+11.7%), Egypt (+7.4%), and Taiwan (+5.2%) were the best performing markets for the quarter.  That said, results in the developed markets of Belgium (+3.4%), Japan (+3.1%), and the Netherlands (+3.1%) were not far behind.  On the other end, Argentina (-46.8%) gave back all of the strong returns from the prior quarter.  Poland (-12.1%), Hong Kong (-11.9%), and South Africa (-11.5%) were also meaningfully weak.

Despite a brief spike in August, market volatility remained largely subdued as trading remained largely driven by news around central bank liquidity and trade.  At the factor level, Stability/Defensive, Low Volatility, and Yield were strongly positive while Smaller Size were significantly negative.  Despite large month to month swings, Value, Momentum, and Quality ended the quarter fairly neutral.  Equal-weighted portfolios continued to underperform market-cap weighted portfolios as larger names continued to pace the rally.