Domestic Markets – 3Q18 Review
U.S. stocks continued their resilient march higher in the third quarter, with equity averages hovering around their respective high water marks. The S&P 500 Index gained 7.7% in the quarter, while the small-cap (as measured by the Russell 2000 Index) returned 3.6%. After lagging in the second quarter, large-cap equities led the way in 3Q. On a style basis, growth stocks once again held the upper hand vs. their value counterparts – a trend that has been in place since the end of 2016.
In our second quarter commentary, Cambiar raised the potential for a reduction in risk appetites – given ongoing trade/protectionist measures. Our concern was that tariffs could neutralize some of the stimulative effects such as tax reform and general economic momentum taking place in the U.S. Clearly, such a cautious posture was not necessary, as any trade fears were more than offset by robust economic growth metrics. The U.S. economy remains the best house on the global block, and even appears to be gaining momentum. While the U.S. economy is clearly running on all cylinders, stocks (and bonds) were also direct beneficiaries of a ‘capital concentration’ trade that took place in the quarter – as a tightening Federal Reserve and strong dollar led to capital flight out of weakening currency economies (e.g., Emerging Markets).
While the underlying strength in the U.S. equity markets is likely to continue, Cambiar believes that some caution is warranted. For example, the pressure on EM currencies and economies is likely to have a negative earnings impact on U.S. multinationals. And while progress on trade has been made with our North America partners, the U.S. and China have yet to meet at the bargaining table. Upcoming mid-term elections may also bring increased volatility to the markets. Lastly, a tight labor market and asset price inflation is likely to result in additional tightening responses by the Federal Reserve. In isolation, it is unlikely that any one of these developments impacts the trajectory for stocks. But taken in combination, these events (i.e., risks) appear to be underappreciated by investors.
Certain information contained in this communication constitutes “forward-looking statements”, which are based on Cambiar’s beliefs, as well as certain assumptions concerning future events, using information currently available to Cambiar. Due to market risk and uncertainties, actual events, results or performance may differ materially from that reflected or contemplated in such forward-looking statements. The information provided is not intended to be, and should not be construed as, investment, legal or tax advice. Nothing contained herein should be construed as a recommendation or endorsement to buy or sell any security, investment or portfolio allocation. Securities highlighted or discussed have been selected to illustrate Cambiar’s investment approach and/or market outlook. The portfolios are actively managed and securities discussed may or may not be held in client portfolios at any given time, do not represent all of the securities purchased, sold, or recommended by Cambiar, and the reader should not assume that investments in the securities identified and discussed were or will be profitable.
Any characteristics included are for illustrative purposes and accordingly, no assumptions or comparisons should be made based upon these ratios. Statistics/charts are based upon third-party sources that are deemed reliable; however, Cambiar does not guarantee its accuracy or completeness. As with any investments, there are risks to be considered. Past performance is no indication of future results. All material is provided for informational purposes only and there is no guarantee that any opinions expressed herein will be valid beyond the date of this communication.