Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist
The market rally off the pandemic-induced lows of late March continued in full force early in the quarter as highly accommodative monetary policy and optimism around further fiscal stimulus gave investors the green light for buying. While markets signaled a generally sanguine perspective, economic and virus-related metrics were more mixed – showing some improvement but also areas of concern. The number of people infected globally with Covid-19 approached 36 million with over 1 million deaths. As it began to dawn on some that we were by no means out of the woods yet, sentiment turned negative in September and calls for a “V-shaped” recovery became more infrequent.
The Russell 3000 Index finished the quarter with a return of +9.2%, a respectable result following the prior quarter’s outstanding returns. Large cap stocks reclaimed leadership as the Russell 1000 Index returned +9.5% while the Russell 2000 Index returned +4.9%. International markets, helped by continued USD weakness, were also positive with emerging markets showing particular strength. The developed market MSCI World ex USA Index returned +4.9% while the developing market MSCI Emerging Markets Index returned +9.6%. With interest rates largely range-bound, fixed income markets were fairly muted. The Bloomberg Barclays US Aggregate Index returned +0.6%. Performance in non-US fixed income was a bit stronger with the Global Aggregate ex-US Index returning +4.1% and the JPM EM Bond Index returning +2.3%.
At the Sector level in US equities, the rebound was led by the economically-sensitive areas of Consumer Discretionary (+19.0%), Materials (+11.9%), and Industrials (+11.9%) and the always in favor area of Technology (+11.9). It was a broad-based rally with ten out of eleven sectors posting positive returns for the quarter as optimism was in great abundance. Energy (-19.2%), Real Estate (+1.1%), and Financials (+3.2%) were relative laggards in the rally. Outside of the US, Technology (+13.4%) and Consumer Discretionary (+12.5%) were the best performing sectors while Energy (-7.1%) and Financials (+0.2%) lagged.
Most country equity markets posted positive aggregate returns in the quarter. A diverse grouping of Sweden (+17.0%), India (+15.8%), Pakistan (+15.6%), and Denmark (+15.3%) were the best performers, but eleven markets posted better than 10% returns. On the negative side, results in Turkey (-14.7%) and Thailand (-12.4%) led decliners. Amongst the major markets, Japan (+7.3%), China (+12.4%), and the UK (+0.8%) were all positive.
Market volatility continued to decline but was still incrementally higher than historical averages. Trade volumes also declined during the quarter as did market breadth. At the factor level, Value and Smaller Size were significantly negative as was Yield. Momentum was the main positive factor for the quarter while exposure to Quality would also have been additive. Market leadership narrowed again to the mega cap growth stocks, leading equal-weighted portfolios to meaningfully underperform market cap-weighted portfolios.