Investment Review

Summer 2018

Small cap investors were rewarded during the second quarter, with small caps beating large caps by 450 basis points. U.S. REITs was the top performing asset class among those we track.

 
Selected Headlines from the Past 12 Months Graphed with the World Stock Market Performance (MSCI All Country World Index)

 
The chart above highlights some of the year’s prominent headlines in the context of global stock market performance as measured by the MSCI All Country World Index-Investable Market Index (MSCI ACWI IMI). We are not offering these headlines to explain market returns. But they do serve as a reminder that investors should view daily events from a long-term perspective and avoid making financial decisions based solely on the news.

 
Investment Review

Benchmark Funds	Q2 2018	12 Months Ending 6/30/2018
U.S. Large Cap Vanguard 500 Index Fund	+3.4%	+14.2%
U.S. Large Cap Value iShares Russell 1000 Value Index	+1.2%	+6.6%
U.S. Small Cap iShares Russell 2000 Index	+7.9%	+17.7%
U.S. Small Cap Value iShares Russell 2000 Value Index	+8.2%	+13.0%
International Vanguard Total International Stock Index Fund	-3.2%	+7.0%
Emerging Markets Vanguard FTSE Emerging Markets ETF	+1.6%	-5.3%
U.S. REITs Vanguard REIT ETF	+8.9%	+2.3%
Investment-Grade Bonds iShares Core Total U.S. Bond Market ETF	-0.2%	-0.5%

Source: SchwabInstitutional.com

 
Individual Asset Classes

The returns for the recent quarter that are listed below are sourced from my.Dimensional.com.

World Asset Classes

Looking at broad market indices, the U.S. outperformed non-U.S. developed and emerging markets during the second quarter. Small caps outperformed large caps in the U.S. but underperformed in both non-U.S. developed and emerging markets. The value effect was negative in the U.S. as well as markets outside the U.S.

U.S. Stocks

TThe U.S. equity market posted a positive return, outperforming both non-U.S. developed and emerging markets in the second quarter. Large cap value stocks underperformed large cap growth stocks in the U.S.; however, small cap value stocks outperformed small cap growth. There was a positive size premium, as small cap stocks generally outperformed large cap stocks in the U.S.

International Developed Market Stocks

In U.S. dollar terms, developed markets outside the U.S. underperformed the U.S. but outperformed emerging markets during the second quarter. Value underperformed growth in non-U.S. developed markets across large and small cap stocks. Small caps underperformed large caps in non-U.S. developed markets.

Emerging Markets Stocks

In U.S. dollar terms, emerging markets posted negative returns in the second quarter, underperforming developed markets including the U.S. The value effect was negative in large caps; however, value and growth stocks had similar performance among small cap stocks within emerging markets. Small caps underperformed large caps in emerging markets.

Real Estate Investment Trusts

U.S. real estate investment trusts outperformed non-U.S. REITs in U.S. dollar terms.

Fixed Income

Interest rates increased in the U.S. during the second quarter. The yield on the 5-year Treasury note rose 17 basis points (bps), ending at 2.73%. The yield on the 10-year T-note rose 11 bps to 2.85%. The 30-year Treasury bond yield climbed 1 bps to 2.98%. The 1-month Treasury bill yield rose 14 bps to 1.77%, while the 1-year Treasury bill yield increased 24 bps to 2.33%. The 2-year Treasury note yield finished at 2.52% after increasing 25 bps.

In terms of total return, short-term corporate bonds gained 0.29%, while intermediate-term corporate bonds declined 0.10%.

Short-term municipal bonds added 0.66%, while intermediate-term munis returned 0.81%. Revenue bonds performed in-line with general obligation bonds, returning 0.90% and 0.87%, respectively.

Conclusion

Despite economic concerns including trade policies and increasing interest rates, most stock asset classes saw positive returns in the second quarter. Investment grade bonds, which dampen volatility of bond-oriented portfolios, saw small negative returns for both the quarter and 12-months ending June 30, 2018.

As always, if you have concerns about your portfolio, let us know.