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

January saw alternating periods of rally and reversal as the markets struggled for direction.  Strong returns in the prior quarter left valuations at less attractive levels and mixed economic data left plenty of ammo for both bulls and bears to act upon.  While the price of oil continued to fall, the rate of decline eased and a near-term floor of $45 appeared to be set.  A surprise decision by the Swiss National Bank to abandon a 3-year-old currency cap, victory for an anti-austerity party in Greece, and the ongoing armed conflict in Ukraine added to macro uncertainty.  On the liquidity front, the ECB became the latest member of the QE club with a €60 billion a month bond-buying program while the Fed indicated that interest rates likely won’t be increased before June.

The US broad market Russell 3000 Index finished the month at -2.8%.  US small cap stocks lagged slightly with the Russell 2000 Index returning -3.2%.  Outside of the US, returns were better with the developed market MSCI World ex USA Index returning -0.4% while the MSCI Emerging Markets Index returned +0.6%.

Active manager performance for the month was challenged by the same market dynamics that have been at work for the past 12-18 months – narrow markets and lower cross sectional volatility.  Volatility as measured by the VIX and 20 day price movements did increase, but trading volumes remained lower than historical averages.  On a factor basis, underweights to value and overweights to momentum and lower volatility were helpful with quality and stability largely neutral.