Quarterly Market Update - Q3 2018 By: Gabriel PotterMBA, AIFA® 2018.10.11

Key news stories

It is true that securities markets, outside of US equities, has had a rough third quarter but the actual underlying economic activity is less worrisome than expected.  There were a few events with the possibility of damaging the good economic roll the US has been on, but our fundamentals have continued to remain strong.  Hurricane Florence hit the Southeastern US, but was downgraded several times by the time it made landfall.  Outside the US, there were reports of strain on international banking giants in Europe, but the challenges facing the continent appear less severe than the 2011 European debt crisis. 

Equities

The winning strategy of the year thus far has been momentum stocks – reinvesting into previous winners.  Large-growth, technology names like Apple (+34% YTD), Amazon (+71%YTD), Microsoft (+35% YTD), and Netflix (+94%). have dominated market cap weighted indices this year. In contrast, the strong dollar hurt directly detracted from returns overseas.  Several policy decisions hurt international investments including increasing rates (making US debt more expensive), US dollar repatriation, and various tariff scares.

INDEX

3Q 2018

YTD 2018

US Large Cap Growth - Russell 1000 Growth

9.17%

17.09%

US Large Cap Value - Russell 1000 Value

5.70%

3.92%

US Small Cap Growth - Russell 2000 Growth

5.52%

15.76%

US Small Cap Value - Russell 2000 Value

1.60%

7.14%

Developed International Markets - MSCI EAFE

1.35%

-1.43%

Emerging Markets - MSCI EM

-1.09%

-7.68%


Bonds

The Federal Reserve has been holding a steady course, increasing rates by 0.25% per quarter.  A rising rate environment impacts long duration bonds, but all traditional bond classes have suffered in the past year.  The only winners are non-traditional bonds like floaters (which track increasing rates), high yields (which operate more like equities), or convertible securities (which, as the name implies, can be converted to equities.  Despite weakness in the bond market, the benefit of low correlations (i.e. one asset class improving while the other is lagging) couple with the modest losses are encouraging.

 

INDEX

3Q 2018

YTD 2018

Barclays Capital US Aggregate Bond

0.02%

-1.60%

Barclays Capital US Intermediate Credit

0.73%

-0.73%

Barclays Capital US Government

-0.57%

-1.62%

Barclays Capital US Gov’t/Credit Long Duration

-0.47%

-5.42%

ICE B. of America/Merrill Lynch High Yield

2.44%

2.52%

FTSE World Government Bond Index (non USD)

-2.19%

-3.09%

 

Alternatives

Despite increasing rates, the threat of inflation has been incredibly stable and low, meaning TIPS trade relatively neutrally compared to a comparable treasury.  Note:  there is some disparity in the pricing of commodity alternatives; indices which equal-weight metals will underperform market-weighted alternatives which emphasize energy commodities.

 

INDEX

3Q 2018

YTD 2018

Real Estate - FTSE NAREIT All REITs TR

0.69%

1.80%

Commodities - Morningstar Long Only Commodity TR

0.81%

5.21%

Inflation - Barclays US Treasury TIPS

-0.82%

-0.84%

Hedge Fund - Morningstar Broad Hedge Fund TR USD

-1.85

0.08

 

 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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