The weakness of the first quarter, when the S&P 500 closed lower in February and March, has become a distant memory. Building on the momentum coming out of the second quarter, the S&P 500 hit a new closing high on August 24th, surpassing the one set on January 26th. The rally in large cap stocks continued unabated through September, a month that has registered positive returns in only a third of the years since the 1960’s. Small cap stocks were unable to escape the September doldrums and, after pacing their large cap peers for much of the year, wound up lagging badly in the quarter. Like the second quarter, both growth and value stocks “worked” as they moved higher together, though growth continued to widen the performance gap compared to value. Dollar strength, slowing growth and trade related fears all conspired to hold down international indices: developed international returns were muted, and emerging markets were outright negative once again. China, down over 24%, sank firmly into the grip of a bear market. The continuing performance divergence between small caps and emerging markets has reached nearly historic proportions.
The second quarter got off to a most inauspicious start when, on the first trading day of April, the S&P 500 closed below its 200-day moving average for the first time in 442 trading days, the 6th longest streak in history. Domestic markets then rebounded to post gains in each month of the quarter, ending positive for the year. Even with the rebound, large cap stocks were stuck in a trading range as the opposing forces of a strong US economy and heightened trade tensions worked against each other. The biggest beneficiary of the strong domestic economy argument were small cap stocks, which easily outpaced their large and midcap peers by an even wider margin than what was seen in the first quarter. Growth stocks continued their dominance over value that began in early 2017. Fears of slowing global growth, potential for a trade war and the strains of a rising dollar all favored the relatively lower risk of US equities vs. foreign. Emerging economy markets were especially hard hit because they are more likely to feel the stress of an appreciating dollar and are generally more reliant on exports.