Q3 2018 Market Commentary


  • 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. 


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

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