Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist
With the US and China moving towards a slow-motion settlement (or more accurately, détente) of their trade conflict, investors were free to focus on the positives of ample liquidity, solid employment, muted inflation, and positive momentum to continue driving the markets upwards. Even concerns about global manufacturing performance and weaker forward-looking macroeconomic growth were not enough to derail what would be an exceptional year in most asset classes. The dovish posturing that came along with the pause in interest cuts by the US Fed provided further support to market valuations.
The Russell 3000 Index finished the quarter with a return of +9.1%, capping off an exceptional year in which it returned +31.0%. Large cap stocks were modestly behind small caps in the quarter but remained comfortably ahead on a year-to-date basis. The Russell 1000 Index returned +9.0% during the quarter and +31.4% for the full year while the Russell 2000 Index returned +9.9% during the quarter and +25.5% for the full year. Positive news on the trade front helped International markets round out a strong year, but they still lagged the US market meaningfully. The developed market MSCI World ex USA Index returned +7.9% while the developing market MSCI Emerging Markets Index returned +11.8%. For the full year, the MSCI World ex USA Index returned +22.5%, and the MSCI Emerging Markets Index returned +18.4%. Fixed income markets were fairly muted with the Bloomberg Barclays US Aggregate Index returning +0.2% for the quarter, contributing to a solid year-to-date return of +8.7%.
At the Sector level in the US for the quarter, positive investor sentiment drove the robust returns in the growth-oriented sectors of Health Care (+14.9%) and Information Technology (+14.1%). All sectors were positive but defensive areas such as Utilities (+0.3%), Real Estate (+0.7%), and Consumer Staples (+3.6%) were relative laggards. Similar dynamics played out outside of the US as Information Technology (+15.4%) and Health Care (+12.6%) led and Consumer Staples (+2.3%) and Utilities (+5.4%) lagged.
At the country level, Pakistan (+26.9%), Argentina (+21.1%), and Hungary (+21.0%) were the best performing markets. All markets saw positive returns with the exception of Chile (-10.1%), Thailand (-1.1%), and UAE (-0.9%).
As has been the case for most of the year, market volatility remained very low in the absence of any significant news. At the factor level, Quality and Smaller Size were incrementally positive while Stability/Defensive and Yield were significant drags. Low Volatility and Momentum were also negative. With the narrowness of market leadership, equal-weighted portfolios continued to underperform market-cap weighted portfolios.