Q3 2018 Market Commentary

Highlights

  • Strongest quarter for S&P 500 since 2013 Q4; strong performance by SYLC
  • Rising macro risks highlight that diversification matters
  • IT and Information business risks start to diverge
  • Interest rates and tax changes create headwinds for home builders
  • Energy leads SEADM on the back of Brent price recovery and merger activity

Strong Domestic Large Cap Performance in Q3

Performance does not reflect fees or implementation costs as an investor cannot directly invest in an index.
In the third quarter the S&P 500 had its best performance in almost five years, returning 7.7% and hitting a record high on 21 September. Mega cap tech stocks pulled the benchmark higher, with Apple and Amazon both breaking the 1 trillion USD mark. The Syntax Stratified LargeCap delivered strong performance, rising 6.0%. SYLC’s well-diversified strategy was supported by positive earnings growth (up 23% YoY compared with Q3 2017), strong economic growth (GDP growth of 4.2% in Q2, unemployment rate of 3.7%) and tax reforms. A steady stream of buybacks also helped to support equity prices this quarter. 
Performance does not reflect fees or implementation costs as an investor cannot directly invest in an index.
After outperforming in Q2, the mid cap universe struggled to keep pace with larger stocks in Q3. The Stratified MidCap Index (SYMID) outperformed cap weight, returning 4.7% during Q3, while the S&P MidCap 400 Index (MID) returned 3.9%. Despite underperforming this quarter, the Stratified MidCap continues to outperform the S&P 500 YTD (10.9% vs. 10.6%). 

Global macro risks rising

Against the backdrop of a strong US economy, geopolitical risks persisted in Q3. China and the US continued to spar over trade and in August the Trump administration moved to reimpose sanctions on Iran following America’s withdrawal from the Joint Comprehensive Plan of Action. Macro uncertainty kept the dollar range-bound and saw international equities underperform their domestic counterparts. In local currency, the Syntax Europe Asia Developed Markets (SEADM) index rose 3.0% and a cap-weighted comparable index rose 2.4%. 

Trillion Dollar Listings! 

In Q3, Apple became the first company to attain a 1 trillion USD market capitalization, followed (temporarily) by Amazon. The larger allocation to mega cap tech in most equity indices saw the S&P 500 Index become even more reliant on a small number of stocks. In Q3, the FAANGs and Microsoft contributed 1.8% of the S&P 500’s 7.7% return and comprised 16.4% of the index by quarter end. Syntax’s rules-based stratification avoids excessive business risk concentrations and as such, the same six companies only account for 1.3% of the Stratified LargeCap Index, and SYLC garnered only 0.15 percentage points from them. 
 
This quarter highlighted the importance of a well-diversified strategy as the FAANG stocks’ performances diverged. The risk in holding the FAANG stocks at such large weights was demonstrated this quarter when Netflix missed its subscriber growth expectations and consequently fell (4.4%) after its earnings were announced, and when Facebook’s earnings miss on July 25th caused the biggest one-day loss in value for any listed company in US history. The stock ended the quarter down 15.4%, after being up 21.6% in Q2. 

Diverging “Tech” Performance

The differing fortunes among the FAANG stocks were seen in tech stocks more broadly. Within this heterogeneous group of companies, Syntax uses its Functional Information System (FIS) to better identify the business risks which affect companies’ performance. Syntax’s stratified hierarchy differentiates between “IT” and “Information” companies. 
The key differences in the business risks of these companies were born out in the sectors’ diverging performance over the quarter:
  • IT, which includes AAPL (+22.4% QoQ) and MSFT (+16.43% QoQ) was up 8.8% and 13.4% in the stratified and cap-weighted indices, respectively.
  • Information, which includes FB (-15.36% QoQ), NFLX (-4.42%), GOOG (6.98%) and AMZN (+17.84%) trailed with stratified and cap-weighted returns of 3.9% and 4.8%, respectively.

Headwinds for home builders

FIS-defined company groups give Syntax greater granularity when evaluating the impact of events on parts of the index. In September the Federal Reserve continued to raise rates to 2.25%, citing the strong economy. The rise in interest rates, coupled with a forthcoming reduction in the level of mortgage deductions put downward pressure on the mortgage market and developers. The Stratified LargeCap Home Developers group fell 7.3% in Q3 and YTD this group has lost 22.4%. This negative impact is also seen in the poor performance of the Stratified MidCap Residential Real Estate Banking group (-5.7%) and Real Estate Developers (-15.8%). 

International Energy leads SEADM higher

The SEADM Energy sector returned 4.9% (the best performing SEADM sector), and the cap weight sector rose 3.2%. YTD Energy is the best performing global sector: up 11.8% in SEADM and 11.2% in EAFE. The sector was supported by a recovery in the price of Brent oil, which finished the quarter just under $83/bbl, its highest levels since 2014. Impending tightening of sanctions on Iran, reduced Venezuelan production, and limits in spare production capacity have decreased global supply despite recent increases in US shale production. The different supply and demand dynamics were highlighted by the spread between Brent and WTI which widened to almost $10 from $2.82 at the start of the quarter.  
The Oil and Gas group returned 8.6% in SEADM and 4.5% in EAFE. The stratified group outperformed as it was better diversified throughout the industry and thus exposed to greater upside in the upstream companies and refiners. A further boost to the Downstream group of companies was the approval of a merger between Showa Shell Sekiyu and Idemitsu Kosan Company. The announcement drove the stocks up 42% and 49.6% for the quarter. 

Disclaimers

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. 

The Syntax Stratified LargeCap Index, Syntax Stratified MidCap Index, and Syntax Europe & Asia Developed Markets (“SEADM”) Index are the property of Syntax, LLC, which has contracted with S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC) to calculate and maintain the Indices. The Indices are not sponsored by S&P Dow Jones Indices or its affiliates or its third party licensors (collectively, “S&P Dow Jones Indices”). S&P Dow Jones Indices will not be liable for any errors or omissions in calculating the Index. “Calculated by S&P Dow Jones Indices” and the related stylized mark(s) are service marks of S&P Dow Jones Indices and have been licensed for use by Syntax, LLC. S&P® is a registered trademark of Standard & Poor's Financial Services LLC (“SPFS"), and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). The MSCI EAFE Index was used by Syntax, LLC as the reference universe for selection of the companies included in the SEADM Index. MSCI does not in any way sponsor, support, promote or endorse the Index. MSCI was not and is not involved in any way in the creation, calculation, maintenance or review of the Index. The MSCI EAFE Index was provided on an “as is” basis. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating the MSCI EAFE Index (collectively, the “MSCI Parties”) expressly disclaim all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non‐infringement, merchantability and fitness for a particular purpose). Without limiting any of the foregoing, in no event shall any of the MSCI Parties have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages in connection with the MSCI EAFE Index or the SEADM Index. Prior to March 19, 2018, the SEADM Index was calculate by NYSE. Sector subsets of the Syntax Stratified LargeCap, Syntax Stratified MidCap, and SEADM Indices are calculated using model performance generated in FactSet, and as such may differ from index calculations performed by S&P Dow Jones Indices. Syntax®, Stratified®, Stratified Indices®, Stratified-Weight™, Stratified Benchmark Indices™, Stratified Sector Indices™, Stratified Thematic Indices™, and Locus® are trademarks or registered trademarks of Syntax, LLC and its affiliate Locus LP. FactSet® is a registered trademark of FactSet Research Systems, Inc. 

Index performance does not represent actual fund or portfolio performance and such performance does not reflect the actual investment experience of any investor. An investor cannot invest directly in an index. In addition, the results actual investors might have achieved would have differed from those shown because of differences in the timing, amounts of their investments, and fees and expenses associated with an investment in a portfolio invested in accordance with an index. None of the Syntax Indices or the benchmark indices portrayed herein charge management fees or incur brokerage expenses, and no such fees or expenses were deducted from the performance shown; provided, however that the returns of any investment portfolio invested in accordance with such indices would be net of such fees and expenses. Additionally, none of such indices lend securities, and no revenues from securities lending were added to the performance shown.  

The S&P 500® Index is an unmanaged index considered representative of the US mid- and large-cap stock market. The MSCI EAFE Index is an unmanaged index considered representative of the European, Australian, and East Asian large-cap stock market. Benchmark data for the S&P 500 and S&P MidCap 400 Indices are provided by S&P Dow Jones through FactSet®. Benchmark data for the MSCI EAFE index is provided by MSCI through FactSet.

This document is for informational purposes only and is not intended to be, nor should it be construed or used as an offer to sell, or a solicitation of any offer to buy, any security. Additionally, the information herein is not intended to provide, and should not be relied upon for, legal advice or investment recommendations. You should make an independent investigation of the matters described herein, including consulting your own advisors on the matters discussed herein. In addition, certain information contained in this factsheet has been obtained from published and non-published sources prepared by other parties, which in certain cases have not been updated through the date hereof.  While such information is believed to be reliable for the purpose used in this factsheet, such information has not been independently verified by Syntax and Syntax does not assume any responsibility for the accuracy or completeness of such information. Syntax LLC, its affiliates and their independent providers are not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein.

Certain information contained in this presentation is non-public, proprietary and highly confidential and is being submitted to selected recipients only. Accordingly, by accepting and using this factsheet, you will be deemed to agree not to disclose any information contained herein except as may be required by law. This factsheet and the information herein may not be reproduced (in whole or in part), distributed or transmitted to any other person without the prior written consent of Syntax. Distribution of Syntax data and the use of Syntax indices to create financial products requires a license with Syntax and/or its licensors. Investments are not FDIC insured, may lose value and have no bank guarantee.