Q1 2018 Review

2018 Q1 Market Review

Q1 2018 Review

Unlike in past quarters, large cap U.S. stocks took a step back in 2018's initial three months. In fact, the blue-chip S&P 500 index suffered its first quarterly loss since 2015, sliding 0.76%. But looking more closely at styles across market-cap sizes, IFA index returns were more of a mixed bag with growth stocks outperforming value.

Such a divergence in returns was reflected in technology stocks, typically classified as a more growth-oriented sector of the U.S. market. Along with several major consumer names, tech stocks jumped off to a fast start. By Q1's end, though, clouds had formed as Russian hacking charges hit shares of Facebook. Questions about online security issues spread later in Q1 to Alphabet (Google's parent) and Twitter, among others. Another major tech and retail player, Amazon.com, came under criticism by President Trump for not paying enough in taxes.

Value-styled stocks were hampered in the quarter after February's better-than-expected job and average hourly earnings growth numbers pointed to a tighter labor market. That helped to raise inflationary concerns, as did plans by the Trump Administration to apply tariffs on imported steel as well as products coming from China. Fears of interest rate hikes in coming quarters by the U.S. Federal Reserve also were credited by market analysts for subdued sentiment about buying more value-styled stocks in Q1.

International developed markets also had a tough quarter. The eurozone economy kept growing in Q1. But after a fast start, GDP expansion slowed across the region. Inflationary fears and concern about interest rate hikes later in 2018 also rattled markets, as did political turmoil in parts of developed central Europe. The UK's stock market also lagged as ongoing Brexit jitters helped its stock market decline even more than international developed stocks on the whole.

Emerging markets were a bright spot in 2018's initial quarter. In Brazil, shares rallied after a corruption sentence against former President Luiz Inacio Lula da Silva was upheld on appeal. Meanwhile, emerging Europe was boosted by a run in Russian stocks as oil prices rose and the country's sovereign debt was upgraded by S&P's credit ratings service. Stocks in China largely followed emerging markets' overall uptick in Q1 by gaining 1.9%, according to the MSCI Emerging Markets Index. Despite concern about a possible trade war with the U.S., the world's second-largest economy reported quarterly GDP growth of 6.8% from a year earlier, which beat consensus expectations of economists surveyed by Reuters.

 

Domestic Equities 

Returns for the different size and style of domestic equities differed quite a bit in Q1 of 2018. The returns ranged from 2.09% for small cap growth equities to -2.35% for large cap value equities. Meanwhile, stocks as captured in IFA's blended domestic large cap benchmark dipped slightly as large cap growth equities ended up with positive gains of 1.19%.

Return of IFA Domestic Equity Indexes
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 -1.75% for Q1. This was a bit less than the U.S. market as broadly measured by the Russell 3000 Index, which returned -0.64% in the same time period.

 

International (Developed) Equities

Although equities from developed countries that are outside the United States had a negative first quarter, IFA index returns generally held up a bit better than domestic benchmarks. In Q1, results ranged from -2.26% for international small cap value equities to -0.38% for international small company equities. When looking at the previous quarter's returns, Q4 2017 had positive returns ranging from 5.43% (international value equities) to 4.61% (international small cap equities).

Returns of IFA International Equity Indexes
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 -1.32% in Q1. This was better than the MSCI World ex US All Cap Index, a widely followed benchmark of developed international stocks, which delivered a return of -1.76%.

Returns by developed country in Q1 ranged from -7.47% (Canada) to 6.45% (Finland). Top performing countries included Italy (4.70%), Singapore (3.00%), Portugal (2.34%), Japan (1.06%), and France (0.24%). The worst performing countries included Australia (-5.87%), Israel (-3.65%), United Kingdom (-3.50%), Germany (-3.25%), and Hong Kong (-1.54%).

 

Emerging Markets

Emerging Markets had the strongest quarter of all major equity asset classes, although growth did slow sequentially. For Q1, the returns ranged from 2.24% for emerging markets value equities to 1.84% for emerging markets equities. By comparison, Q4 2017 generated returns ranging from 8.58% (emerging markets small cap equities) to 7.22% (emerging markets large equities).

Returns of IFA Emerging Markets Equity Indexes
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 Q1 was 1.80%. Our mix outperformed emerging markets as a whole (as measured by the MSCI Emerging Markets Index) during Q1. The MSCI EM benchmark delivered a 0.92.% return in 2018's first quarter.

Returns by country in Q1 ranged from 12.45% (Egypt) to -11.01% (Philippines). Top performing countries included Brazil (10.52%), Russia (9.21%), Thailand (6.10%), (Taiwan (4.96%) and Mexico (1.32%). Worst performing countries included Poland (-8.36%), India (-8.33%), Indonesia (-5.80%) and Korea (-0.44%).

 

Real Estate

Global real estate was a picture of the broad benefits of diversification. As a group, this asset class reversed course from 2017's final months, sliding by -4.66% in this year's Q1 versus gaining 3.72% in the previous quarter. But first quarter results in 2018 varied greatly between domestic and foreign fare, with domestic REITs losing -6.99% in the first quarter while international real estate stocks returned -0.77%.

Returns of IFA Real Estate Index
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 Q1, resulting in a change in return for our fixed income positions. In the first quarter, the 30-year U.S. Treasury rate increased 16 basis points while the five-year U.S. Treasury rate made a positive move of 31 basis points.

For Q1, the four fixed income funds used by IFA delivered mixed returns ranging from -0.37% for Five-Year Global bonds to 0.12% for One-Year bonds.

Returns of IFA Fixed Income Indexes
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 -0.18% for Q1. This is what we would expect in a rising interest rate environment.  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 0.90% advisory fee for the 2017 final returns numbers.

Return of IFA Index Portfolios
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 of 0.9%. 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 return 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 they recommend for clients and as part of that process, we've developed a rating system. Below is a link to our Performance Monitoring Report for client portfolios: IFA 1st 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/