2Q 2018 Market Summary
Global equity markets were a mixed bag during 2Q 2018. U.S. markets performed relatively well, while non-U.S. markets struggled. The S&P 500 Index returned 3.4% during the quarter, bringing the year-to-date return to 2.7% through the end of June. Consumer discretionary, energy, and technology stocks drove markets higher during the quarter, as online retailers and internet media companies performed well. Rising oil prices helped energy stocks move higher. Detractors included the consumer staples, financial, and industrial sectors, each of which posted negative returns during the quarter.
At the strategy level, growth stocks continued to outperform value stocks, in large part due to the sector trends mentioned above. The Russell 1000 Growth Index returned 5.8% during the quarter compared to 1.2% for the Russell 1000 Value Index. Information technology stocks make up nearly 36% of the Russell 1000 Growth Index, while the consumer discretionary sector accounts for about 18% of the index. These sectors make up just 9.5% and 7.2%, respectively, for the Russell 1000 Value Index, which instead has greater emphasis on energy and financial stocks. This difference in index composition largely explains the underperformance of value-focused strategies relative to growth in recent years.
While broad U.S. equity markets were up during the quarter, domestic small-cap stocks performed especially well as many smaller companies benefitted from recent tax cuts. The Russell 2000 Index posted a 7.8% return during the quarter and was up 7.7% year-to-date through the end of June.
Non-U.S. stocks were a disappointment during the quarter. The MSCI EAFE Index lost 1.2% and was down 2.8% year-to-date. Emerging Markets were hit even harder. The MSCI Emerging Markets Index declined 8%, resulting in a 6.7% decline year-to-date. A strengthening dollar played a role in these negative returns during the quarter, as the local currency version of both indexes actually posted positive returns during the same time period.
The Federal Reserve hiked its key Federal Funds rate in June by 0.25% to a targeted range between 1.75% - 2.00%. This move pushed rates higher across the yield curve, but to varying degrees. Short-term rates continue to increase more than longer-term rates. One-year Treasury yields rose 0.23% to end the second quarter at 2.31%, while 10-year yields only rose 0.03% to 2.85% (though 10-year yields did temporarily climb over 3% during the quarter). Longer-term yields, like 30-year Treasury yields, were effectively unchanged during the quarter, resulting in continued flattening of the yield curve.
The rise in rates resulted in meek returns for most fixed income sectors, as bond prices decline when rates rise. The Bloomberg Barclays U.S. Aggregate Bond Index declined almost 0.20% during the quarter and was down 1.6% year-to-date through the end of June. The Bloomberg Barclays U.S. Corporate Bond Index declined 1% during the quarter and was down 3.3% year-to-date. The Bloomberg Barclays Municipal Bond Index returned 0.9% during the quarter but was down 0.3% year-to-date.
Commodities, as measured by the Bloomberg Commodity Index, were up 0.4% during the quarter, and unchanged for the year. However, these flat returns do not reflect the strong environment for energy prices. The price of a barrel of West Texas Intermediate oil rose from $63 to $74 by the end of June. At the same time, the LBMA Gold Price Index declined 5.5% during the quarter, and was down 3.5% year-to-date.