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

At the start of the quarter, there were a number of macro events for investors to assess (e.g. the Panama Papers leak, an impeachment in Brazil, possible Brexit, energy company bankruptcies), but overall volatility was fairly low. Reinforcing the ongoing importance of central bank liquidity, weak growth was seen as a positive by the markets as it meant that the Fed and others would likely stay accommodating for longer. Oil prices reached their highest level of the year on increased gasoline demand and declining US inventories. Corporate earnings were mixed with Wall Street banks showing meaningful declines and Apple reporting its first quarterly revenue decline in 13 years. In a period of limited major macro news, investors fixated mostly on the likelihood of a Fed rate increase in the coming months. Economic data was generally weak as Japan and China both struggled to reposition towards organic growth, Europe (while improving) still faced structural impediments to action, and the US grappled with the limits of monetary stimulus. US employment, which had been a strong datapoint for a while, came in surprisingly weak, most likely delaying the next Fed rate increase. Corporate M&A continued to be robust but further served to highlight how little organic growth there was available to be had. The end of the quarter brought the culmination of the British referendum on EU membership (i.e. Brexit). Uncertainty increased as the referendum approached (June 23), but the final result of a win for “Leave” still stunned markets with the Pound falling to a 30 year low and many equity markets suffering significant losses in the two days following. However, the market declines were almost immediately recouped as the immediate fallout was contained, and market liquidity and function were largely normal.

For the quarter, the US broad market Russell 3000 Index finished at +2.6% as a strong rally in the last few days halted the negative momentum a win for Brexit had unleashed. US small cap stocks were able to do better as the Russell 2000 Index returned +3.8%. Outside of the US, developed markets were impacted more by Brexit, and the MSCI World ex USA Index returned -1.1%. Cheaper valuations and more modest exposure to the UK allowed developing markets to modestly outperform as the MSCI EM Index returned +0.7%.

Despite all the market action intra-quarter, volatility was fairly muted. Both daily price volatility and implied volatility were on the lower end of their ranges for the last twelve months. Average volumes traded declined from the elevated levels of Q1. At the factor level, Value, Stability, and Smaller size were all strongly positive while Quality and Momentum lagged. At the sector level, Energy, Utilities, and Health Care led while Technology and Consumer Discretionary were the only negative performers for the quarter.