Q2 2018 Review Banner

2018 Q2 Market Review

Q2 2018 Review Banner

Despite threats of a burgeoning trade war between the U.S. and China, domestic stocks kept rising in this year's second quarter. The blue-chip S&P 500 index produced a total return of 3.43% in the quarter while the Dow Jones Industrial Average ticked up 1.26%. Still, both benchmarks moved into the second half of 2018 below their record highs hit earlier in the year.

Besides announcing tariffs against the world's second-biggest economy, President Donald Trump made plans during Q2 for trade restrictions against the European Union, Canada and Mexico. But entering earnings season (when companies report their financial health for Q2), Wall Street analysts were expecting around 20% growth from S&P 500 constituents compared to the same period a year earlier. That growth rate would be slightly down from Q1, which reached a seven-year high.

Domestic investors turned to small-cap stocks, which on a percentage revenue basis typically conduct more business in the U.S. than internationally. The small-cap Russell 2000 Index returned 7.75% in Q2.

Also worth noting in the quarter, growth-styled stocks continued to outpace value-oriented fare: The S&P 500 Growth Index gained 5.25%, while its cousin value large-cap benchmark rose by 1.40%. The technology focused Nasdaq 100 Index shot up 7.27% in Q2 while the top performing sectors in the S&P 500 were energy and consumer cyclicals, according to Morningstar. 

International markets didn't do as well. The widely followed MSCI EAFE Index of developed foreign stocks slid by -0.97% in Q2. Meanwhile, the MSCI Emerging Markets Index returned -8.83%.

Domestic Equities

Returns for the different size and style of domestic equities differed quite a bit in Q2 of 2018. The returns ranged from 7.00% for small-cap growth equities to 0.37% for large-cap value equities. Meanwhile, stocks as captured in IFA's blended domestic large-cap benchmark jumped by more than 3% as IFA's U.S. large-cap growth index ended up with a positive gain of 5.90%. 

Returns of IFA Domestic Equity Indexes Q2 2018
Unless indicated otherwise, the performance of the IFA Indexes when shown individually, do reflect mutual fund fees, include reinvestment of dividends and capital gains but do not include IFA advisory fees, transaction costs or taxes. For more please see indexdescriptions.com. Indexes are not available for direct investment and performance does not reflect expenses of anactual portfolio.

For the domestic equity indexes used in IFA portfolios, the quarterly return was 4.78% for Q1. This was more than the U.S. market as broadly measured by the Russell 3000 Index, which returned 3.88% in the same time period.

International (Developed) Equities

IFA index returns from developed countries that are outside the United States posted a negative second quarter. In Q2, results ranged from -1.96% for international small-cap equities to -3.47% for international small company value stocks. When looking at the full-year results through Q2, the initial six months of 2018 saw returns ranging from -2.33% (international small caps) to -5.66% (international small-cap value).

Returns of IFA International Equity Indexes Q2 2018
Unless indicated otherwise, the performance of the IFA Indexes when shown individually, do reflect mutual fund fees, include reinvestment of dividends and capital gains but do not include IFA advisory fees, transaction costs or taxes. For more please see indexdescriptions.com. Indexes are not available for direct investment and performance does not reflect expenses of anactual portfolio.

For the blend of international indices used in the IFA Index Portfolios, the return was -2.91% in Q2. This was worse than the MSCI World ex-US All Cap Index, a benchmark of developed international stocks, which delivered a return of -0.83%.

Returns by developed country in Q2 ranged from 5.91% (Israel) to -10.54% (Austria). Top performing countries included Canada (4.26%), Australia (3.98%), Norway (3.46%) and Ireland (2.31%). The worst performing countries included Singapore (-9.71%), Italy (-8.57%) and Belgium (-7.28%).

Emerging Markets

Emerging Markets had the worst quarter of all major IFA equity asset classes. For Q2, EM returns ranged from -9.71% for emerging markets small-cap equities to -9.21% for emerging markets value equities. By comparison, so far in 2018 returns ranged from -8.42% (emerging markets small-cap equities) to -7.17% (emerging markets value equities).

Returns of IFA Emerging Markets Equity Indexes Q2 2018
Unless indicated otherwise, the performance of the IFA Indexes when shown individually, do reflect mutual fund fees, include reinvestment of dividends and capital gains but do not include IFA advisory fees, transaction costs or taxes. For more please see indexdescriptions.com. Indexes are not available for direct investment and performance does not reflect expenses of anactual portfolio.

For the blend of emerging markets indices used in IFA Index Portfolios, the return for Q2 was -9.37%. Our mix underperformed the MSCI Emerging Markets Index, which returned -7.86%.  

Returns by country in Q2 ranged from 4.34% (Qatar) to -26.92% (Turkey). Top performing countries included Colombia (4.27%%), India (-2.57%), China (-4.1%) and Greece (-4.72%). Worst performing countries included Brazil (-26.65%), Hungary (-16.85%) and Thailand (-16.36%).

Real Estate

Global real estate was a picture of the broad benefits of diversification. In the second quarter, international real estate stocks returned -0.38%. But domestic REITs gained 8.68%, providing the IFA Global Real Estate Index with a 5.36% blended return in Q2.

Returns of IFA Real Estate Index Q2 2018
Unless indicated otherwise, the performance of the IFA Indexes when shown individually, do reflect mutual fund fees, include reinvestment of dividends and capital gains but do not include IFA advisory fees, transaction costs or taxes. For more please see indexdescriptions.com. Indexes are not available for direct investment and performance does not reflect expenses of anactual portfolio..

Fixed Income

Interest rates in U.S. income markets increased during Q2, resulting in a change in return for our fixed income positions. In the second quarter, the 30-year U.S. Treasury rate increased by 1 basis point while the five-year U.S. Treasury rate made a positive move of 18 basis points.

For Q2, the four fixed income funds used by IFA delivered returns ranging from 0.55% for Five-Year Global bonds to 0.09% for Short-Term Government bonds.

Returns of IFA Fixed-Income Indexes Q2 2018
Unless indicated otherwise, the performance of the IFA Indexes when shown individually, do reflect mutual fund fees, include reinvestment of dividends and capital gains but do not include IFA advisory fees, transaction costs or taxes. For more please see indexdescriptions.com. Indexes are not available for direct investment and performance does not reflect expenses of anactual portfolio.

For the blend of fixed income used in the IFA Index Portfolios, the return was 0.39% for Q2. This is what we would expect when interest rates have gone up. If interest rates rise, the value of bonds will diminish because investors can get a higher rate of return on newly issued bonds with the same maturity that are currently being offered in the market.

IFA Index Portfolios

The returns of the IFA index portfolios are shown below net of the maximum annual 0.90% advisory fee through June 30, 2018. 

IFA Index Portfolios Returns Q2 2018
IFA Index Portfolios are labeled with numbers that refer to the percentage of stock indexes in the asset allocation, as opposed to the allocation of bond indexes. For example, an IFA Index Portfolio 90 is 90% IFA stock indexes and 10% IFA bond indexes. For more, go to indexdescriptions.com. The performance of index portfolios does reflect the maximum annual advisory fee o f0.9%. IFA Index Portfolios do reflect the deduction of mutual fund fees, include reinvestment of dividends, and capital gains. Performance does not include transaction costs or taxes, which if included, would lower performance.

What investors need to remember is that there will always be periods in which their IFA Index Portfolios will underperform in the short-term. This is the very nature of taking risk. Given the recent underperformance in U.S. value stocks as compared to domestic growth stocks in both large- and small-cap market sizes, many investors may be wary about their asset allocation.

The chart below shows rolling period returns of the IFA U.S. Small Cap Value Index versus the IFA U.S. Large Cap Growth Index. Over any given month, the odds of U.S. Large Cap Growth stocks outperforming are slightly less than a coin flip. But once we expand our view to longer time horizons, you can see that a disciplined approach yields favorable results for the globally diversified investor.

Each quarter, IFA monitors the funds it recommends for clients, and as part of that process, we've developed a rating system. Here is a link to our Performance Monitoring Report for client portfolios: IFA 2nd Quarter 2018 IFA Client Performance Monitoring Report.


Performance results for actual clients that invested in accordance with the IFA Index Portfolio Models will vary from the backtested performance due to the use of funds for implementation that differ from those in the index data, market conditions, investments cash flows, mutual fund allocations, changing index allocations over time, frequency and precision of rebalancing, not following IFA's advice, retention of previously held securities, tax loss harvesting and glide path strategies, cash balances, lower advisory fees, varying custodian fees, and/or the timing of fee deductions.

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you.  For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/