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Monthly Outlook – September 2019

September 20, 2019
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Range-Bound, Risk-Off, and Rotation Watch


  • Market Drivers: Uncertainty and escalation in U.S. – China trade relations resulted in a range-bound month for many major U.S. equity benchmarks. Safe havens, such as U.S. government bonds and gold, saw bids throughout a month of elevated volatility and mixed, but negative equity performance.
  • Performance: Defensive Sectors (- 0.58%) and Growth names (- 0.77%) were leaders in August, but at large, relative performance trends continued to hold strong amid the drawdown across equity markets. Large Caps outperformed Small Caps by 3.11%, and the U.S. outperformed International stocks by 2.17%. International Developed Markets outperformed Emerging Markets by 2.32% as trade tensions rose and the U.S. dollar strengthened, and led by the Consumer Staples sector, Defensives outperformed Cyclicals for the first time since May.
  • Flows & Positioning: While overall performance trends continued through August, investor flows via ETFs raised some questions, and we are watching for potential rotations across equity exposures. Small caps led large caps, value names saw inflows while growth products saw outflows, and every cyclical sector with the exception of Information Technology saw outflows. International equity ETFs saw net creations while broad U.S. ETFs saw net redemption activity, and the year-to-date leadership in emerging markets flows is now gone.
  • What’s Next?: Uncertainty remains the name of the game. While trade rhetoric has hurt sentiment and increased volatility, global monetary policy has shifted to be generally accommodative. Investors should keep an eye on the channel we have been trading  in throughout August as we approach the upper bound for the third time.



Like May, August was a decidedly risk-off month with global stocks and commodities both delivering negative returns, while safe havens such as sovereign bonds and gold, saw positive performance. The primary driver for August’s range-bound, risk-off activity was the escalation in the China-U.S. trade war, as the announcement of 10% tariffs on $300 billion worth of Chinese imports (in addition to the 25% existing on $250 billion worth of goods) was met with the halting of U.S. agricultural purchases by China’s Commerce Ministry.

The prolonged timeline for any type of resolution to U.S. – China trade relations continues to weigh on global macro, corporate earnings, and investor sentiment, as market participants are starting to show their fatigue as they wait for material progress. Despite this, the S&P 500 closed the month of August at 2,926.46, above its 100-day moving average, and just 3.40% from its all- time high.


Source: Bloomberg Finance, L.P., as of August 31, 2019. One cannot directly invest in an index.



While trade worries and global growth fears continue to dominate headlines, the performance and stark leadership in cyclical sectors and growth stocks is sending a different message. While Cyclical Sectors (led by Financials and Industrials) lagged Defensive Sectors in August, the group has outperformed by 11.78% year-to-date. On a rolling 8-month basis, that puts this year-to-date performance on par with the relative outperformance seen in Cyclical Sectors back in 2017, when “global synchronized growth” was the only headline on investors’ minds.

The group of names exhibiting higher-than-average levels of top-line and bottom-line growth, especially relative to their more conservatively priced counterparts, continues to be rewarded by the market. After outperforming value stocks by 2.17% throughout August, growth stocks have now outperformed by 9.53% on a year-to-date basis. On a rolling 8-month basis, that puts this year’s relative outperformance on par with, again, 2017.


Small caps  were the worst performing equity index out of the group for the month of August, underperforming broad  internationals, emerging markets, and developed markets. While small caps remain a pocket of relative weakness within the U.S. equity markets, it is hard to ignore how dominant U.S. stocks have been relative to international stocks. On a year-to-date basis, the U.S. has outperformed by 9.53%. In fact, on almost every trailing monthly basis going back to 2016, the U.S. has outperformed international stocks. While classic valuation metrics may be signaling for a rotation towards international exposures, we continue to believe that the current macroeconomic environment supports for this trend to continue.


Source: Bloomberg Finance, L.P., as of August 31, 2019. The medium blue line represents the performance spread between the MSCI USA Cyclical Sectors and MSCI USA Defensive Sectors Indexes. The grey line represents the performance spread between the Russell 1000 Growth and Russell 1000 Value Indexes. One cannot directly invest in an index.



While the S&P 500 spent the majority of August in a 100-point range, and closed the month slightly weaker, underlying flows  is telling of the idea that investors spent some time reshuffling portfolio allocations. Large Cap ETFs saw $3.154B more in net redemptions relative to Small Cap ETFs, and Growth ETFs saw $0.415B in net outflows compared to $0.321B in net inflows for Value ETFs, for a spread of $0.737B. Cyclical sectors, led by redemptions in Financials (- $3.040B), saw the largest single month of outflows since December 2018.

Broad U.S. ETFs saw net redemptions of $3.938B, lagging broad international ETFs (+ $0.753B) by $4.691B, which was just the third such occurrence over the last 12 months. While the outflows for emerging markets ETFs is not new, August saw the single largest (by almost $3B) monthly outflow over the last 12 months. The year-to-date positioning leadership in emerging markets relative to development markets has now disappeared.

While some discounting needs to occur with 1-month flow activity, our desk is watching for continued rotation-type activity across these investment vehicles, and watching for flow velocity across all ten equity segments. The activity in August feels quite similar to May, so a recovery in stock market performance could result in a continuation of longer-term flow trends.


Source: Bloomberg Finance, L.P., as of August 31, 2019. Data represented by the difference in net creation or redemption activity over the month of August across the five pairs of equity segments. Data represented by the indices presented below under "Definitions".


Looking ahead, uncertainty remains the name of the game. The escalation in trade tensions and weaker macroeconomic data   has hurt market sentiment and increased volatility, but global monetary policy has clearly shifted to be accommodative, and may be getting more so as both the Federal Reserve and the ECB is expected to cut rates at their next meetings. The key question is whether policy and action will be dovish enough to offset economic weakness.

As always, investors should continue to pay attention to the trend lines, and not the headlines, as they assess forward risks and expectations for returns. With August coming to a close, equity markets are, once again, testing the upper bounds of the range we have seen throughout the majority of the month. Developments around trade, even if just rhetoric, could provide technical support for a move to upside above the range, and we continue to watch economic data releases and key macro benchmarks such as the U.S. 10-Year Yield, the U.S. Dollar, and WTI Crude for clues for the months going forward.


  • Russell 1000: The Russell 1000 Index consists of the largest 1,000 companies in the Russell 3000 Index, which is made up of 3,000 of the largest U.S. companies.
  • Russell 2000: The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization.
  • Russell 1000 Growth: The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
  • Russell 1000 Value: The Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
  • MSCI USA Cyclical Sectors: The MSCI USA Cyclical Sectors Index is based on MSCI USA Index, its parent index and captures large and mid-cap segments of the US market. The index is designed to reflect the performance of the opportunity set of global cyclical companies across various GICS® sectors. All constituent securities from Consumer Discretionary, Financials, Industrials, Information Technology and Materials are included in the Index.
  • MSCI USA Defensive Sectors: The MSCI USA Defensive Sectors Index is based on MSCI USA Index, its parent index and captures large and mid-cap segments of the US market. The index is designed to reflect the performance of the opportunity set of global defensive companies across various GICS® sectors. All constituent securities from Consumer Staples, Energy, Healthcare, Telecommunication Services and Utilities are included in the Index.
  • FTSE All-World ex US: The FTSE All-World Excluding United States Index is a free float market capitalization weighted index. FTSE All-World Indices include constituents of the Large and Mid-capitalization universe for Developed and
    Emerging Market segments.
  • MSCI EAFE IMI: The MSCI EAFE Investable Market Index (IMI), is an equity index which captures large, mid and small cap representation across Developed Markets countries around the world, excluding the US and Canada.
  • MSCI Emerging Markets IMI: The MSCI Emerging Markets Investable Market Index (IMI) captures large, mid and small cap representation across 24 Emerging Markets (EM) countries.

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