3Q 2018 Market Summary
U.S. equity markets continued their upward march during 3Q 2018. The S&P 500 Index returned 7.7% during the quarter and 10.5% year-to-date. Healthcare and industrial stocks led the charge, as these sectors rose 14.5% and 10% respectively. Technology stocks also performed well during the quarter, returning 8.9%. Energy, materials and utilities were laggards during the quarter but even these sectors saw modest gains.
Growth stocks continued to outperform value stocks, as has been the trend for the past several years. As discussed in previous quarters, the Russell 1000 Growth Index maintains significant exposure to technology and consumer discretionary sectors, while the Russell 1000 Value Index is primarily exposed to financial and energy stocks. These differences in sector composition largely explain the divergence in performance between growth and value, as technology-led firms have experienced impressive fundamental growth compared to financial and energy companies.
Small-cap stocks led large-cap equities for most of 2018 but underperformed during the quarter. The Russell 2000 Index, which tracks small-cap stocks, returned 3.6% during the quarter, but declined 2.4% during the month of September 2018.
Non-U.S. stocks showed some signs of stabilization during the past quarter but continue to lag U.S. equity markets. The MSCI EAFE Index, which tracks foreign developed markets, returned a positive 1.4% during the quarter, but this index declined 1.4% since the start of 2018. Volatile currency markets have impacted the returns of non-U.S. stocks. For example, the currency-hedged version of the MSCI EAFE Index posted a positive return of 1.4% year-to-date.
Emerging markets continued their decline during the quarter. The MSCI Emerging Markets Index declined 1.1% during the quarter and dropped 7.7% year-to-date. Currency declines and concerns over trade wars and tariffs negatively impacted emerging markets like China, which makes up just over 30% of the MSCI Emerging Markets Index.
Changes in the interest rate environment continue to drive fixed income markets, as most bond prices typically decline when rates rise. The Federal Reserve raised their key Fed Funds rate for the eighth time since 2015, now targeting a range between 2.00% - 2.25%. This move pushed rates higher across the yield curve; however, short-term rates continue to rise more than longer-term rates, resulting in a flattening yield curve. One-year Treasury rates rose 0.25% to end the quarter at 2.56%, while 10-year Treasury rates rose 0.21% to close the quarter at 3.06% and 30-year rates rose 0.22% to 3.20%.
Under this backdrop, the Bloomberg Barclays U.S. Aggregate Bond Index was essentially flat for the quarter but declined 1.6% year-to-date. Conversely, corporate bonds rated below-investment grade remain one of the few bright spots in the bond market. The Bloomberg Barclays U.S. Corporate High Yield Index rose 2.4% during the quarter and 2.5% year-to-date. Similarly, the S&P/LSTA Leveraged Loan Index, which tracks bank loans, rose 1.8% during the quarter and 4% year-to-date. Both high-yield bonds and bank loans are typically issued by companies with highly-leveraged balance sheets. Thus, many believe these markets are impacted more by underlying economic conditions rather than changes in interest rates.
The Bloomberg Commodity Index declined 2% during the quarter and down 2% since the beginning of the year. Oil prices dipped during the quarter but eventually bounced back to end the quarter at $73 per barrel, essentially unchanged from the start of the quarter. At the same time, the LBMA Gold Price Index declined slightly over 5% during the quarter and down over 10% since the beginning of the year.