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Quarterly Flash Report – September 2018

Key Takeaways

  • U.S. equities continued to shine during the third quarter, outpacing their overseas counterparts and delivering impressive performance over the past twelve months. Domestic stocks have been supported by growing profits and a healthy economic environment.
  • Trade frictions have weighed on international equities. President Trump moved forward with additional tariffs on $200 billion worth of imports from China; this was in addition to tariffs on $50 billion worth of imports already implemented in the summer. The White House has threatened to tariff $267 billion worth of additional Chinese imports, which would cover essentially all of the goods imported into the U.S. from China.
  • In September the Fed hiked rates by 0.25%, for the third time this year. A strong labor market and stable inflation have supported the Fed’s path toward policy normalization. The Fed has signaled to markets that another rate hike is likely to take place in December, followed by the possibility of three more in 2019.
  • MSCI and S&P have updated the GICS (Global Industry Classification Standard) effective September 28th, removing Telecommunication Services in favor of a Communication Services sector. The scope of the sector has been expanded to include the Media and Entertainment industry groups. Companies such as Facebook, Alphabet (Google), and Netflix will move into this new sector. Another notable change impacts Online Retailers, such as eBay and Alibaba, which will move from Information Technology to Consumer Discretionary.

Regional Commentary

  • Sentiment toward Emerging Market equities has deteriorated quickly this year after a blowout 2017, which saw the asset class return over 37%. As trade concerns escalated over the spring and summer months, momentum quickly shifted out of EM in favor of the U.S.
  • U.S. equities have been able to shrug off ongoing trade discussions, and the S&P 500 has propelled to all-time highs.
  • Strong economic growth within the U.S. and rising interest rates have caused strengthening of the USD relative to many Emerging Market currencies this year. News headlines throughout the third quarter highlighted concerns of potential contagion effects, as the value of both the Turkish lira and the Argentine peso depreciated rapidly relative to the U.S. dollar.
  • Turkey comprises less than 1% of the MSCI Emerging Markets Index. Argentina is classified as a Frontier Market, meaning the index does not have any direct exposure to the country.
  • China makes up the largest country allocation within the index (around 31%), and from an attribution standpoint has been the primary contributor to the negative performance.


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