Kai W. Hong, CFA
Managing Director & Chief Investment Strategist
The momentum from the strong rally in October had already begun to weaken in December, but the decline in markets that started the year was truly breathtaking. By the third week in January, major market indexes were down around 10% or more as concerns grew over weakening economic data from China and concerns that declining oil prices signaled broader global weakness. Some of the momentum leaders of the prior year (AMZN, NFLX) became significant laggards, falling twice as much as the broader market. Ineffectual market interventions by the Chinese government further undermined confidence. Economic data out of China continued to be weak, and oil prices fell below $30/barrel. Earnings at financial firms were challenged, and questions arose regarding the valuations of a number of public and private technology companies. While global market volatility was high, the US economy continued to trudge along. A rebound in the price of oil mid-February appeared to ease some investor fears, igniting a market rally as some investors saw the selling as overdone. Against the uncertain backdrop, many central banks, including the US Fed, maintained a more accommodating stance, and the trajectory of future rate increases began to look more shallow despite an improving employment picture. This accommodation further fueled the rally, just as it has in many points throughout this seven year bull market.
For the quarter, the US broad market Russell 3000 Index finished at +1.0% as a strong rally in the second half of the period offset the significant declines from the first half. US small cap stocks continued to lag their larger cap counterparts as the Russell 2000 Index returned -1.5%. Outside of the US, developed markets were modestly behind with the MSCI World ex USA Index returning -2.0% while developing markets finally showed some signs of life as the MSCI EM Index returned +5.7%.
Volatility was fairly high early in the quarter before falling significantly in the market rally of March. Daily price volatility was at the higher end of the range of the last twelve months. Implied volatility as measured by the VIX Index was slightly above its long-term average. Average volume traded was at the highest level in at least a year while a decline in short-interest also helped the late quarter rally. At the factor level, Stability and Value were fairly positive. Smaller size and Momentum lagged. At the Sector level, Utilities and Materials led while Health Care and Financial Services lagged.
