Q3 Market Update - AssetMark

Third Quarter 2018

Q3 2018 Market Overview

Zoë Brunson, CFA

Senior Vice President, Investment Strategies

US equities¹ provided the strongest performance across the broad asset classes, returning 7.7% for the quarter and lifting the year-to-date return to 10.6%. As the S&P 500 hit new highs, it saw its best quarterly return since the end of 2013.
Growth sectors continued to dominate with Technology and Healthcare contributing to over 50% of the quarterly return. Over the year-to-date period, Technology and Healthcare were joined by Consumer Discretionary as the only three sectors that outperformed the broad S&P 500 index, contributing over 85% of the index return.
Concentration of returns was not only seen at the sector level, but also at the individual security level. Over 50% of the year-to-date return of the S&P 500 was driven by eight holdings. Four of the FAANMG² stocks, Amazon, Apple, Microsoft and Netflix, drove 40% of the return while Facebook dragged on returns.
While improving from the second quarter, non-US equity markets³ saw lower relative returns. For the quarter, developed markets⁴ returned 1.4% and the emerging markets⁵ fell by almost 1%. Year-to-date returns remained in negative territory for both developed and emerging markets.
Emerging Market bonds⁶ provided the strongest relative returns across the bond markets in the third quarter, reversing the trend seen in the second quarter. While the US bond⁷ market saw a flat return for the quarter, the strength of the dollar dragged on the international bond markets⁸ leading to a return of -1.7%. Over the year-to-date period, all of the broad bond markets saw negative returns.
Within US fixed income, credit—specifically lower quality credit—saw the strongest returns with the corporate high yield index⁹ returning 2.4% for the quarter. Longer maturity treasuries¹⁰ saw the weakest returns for the quarter with a return of -2.9% as interest rates rose over the quarter.
Using appropriate indices for performance comparisons is critical given the strength of the US equity market. A globally balanced index (60% MSCI ACWI and 40% Bloomberg Barclays Global Aggregate) returned 1.6% for the year to date period, while a purely domestic balanced index (60% S&P 500 and 40% Bloomberg Barclays US Aggregate) returned 5.7%. The 4% point difference was driven in large part by the 6 percentage point difference in the equity indices. For the quarter, the globally balanced index returned 2.3%, over 2 percentage points behind the domestic balanced index.

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¹ US Equities represented by S&P 500
² FAANMG are Facebook, Apple, Amazon, Netflix, Microsoft and Google, now known as Alphabet
³ Non-US Equities represented by the MSCI EAFE
⁴ Ibid
⁵ Emerging markets represented by MSCI Emerging Markets Index
⁶ Emerging markets bonds represented by the Bloomberg Barclays Emerging Market Aggregate
⁷ US bonds represented by the Bloomberg Barclays US Aggregate Bond
⁸ International bonds represented by Bloomberg Barclays Global Aggregate Ex US
⁹ Corporate high yield represented by Bloomberg Barclays US Corporate High Yield
¹⁰ Long-term Treasuries represented by the Bloomberg Barclays US Treasury Long

Asset Class	Index	Description
US Equities	S&P 500	A cap-weighted index that is generally considered representative of the US equity market, consisting of 500 leading companies in leading industries of the U.S. Market capitalizations are generally above $5 billion representing approximately 80% of available market capitalization.
International Developed Equity	MSCI EAFE	A free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of countries considered to represent developed markets, excluding the U.S. and Canada.
Emerging Markets Equity	MSCI Emerging Markets	A free float-adjusted market capitalization index that is designed to measure the equity market performance of countries considered to represent emerging markets.
US Fixed Income	Bloomberg Barclays US Aggregate	The index covers the USD-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS sectors. U.S. Agency Hybrid Adjustable Rate Mortgage (ARM) securities were added to the U.S. Aggregate Index on April 1, 2007.
US High Yield	Bloomberg Barclays US Corporate High Yield	The index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt.
US Investment Grade Credit	Bloomberg Barclays US Corporate	The index is a broad-based benchmark that measures the investment grade, fixed-rate, taxable, corporate bond market. It includes USD-denominated securities publicly issued by U.S. and non-U.S. industrial, utility, and financial issuers that meet specified maturity, liquidity, and quality requirements.
US Short Treasuries	Bloomberg Barclays US Treasury 1-3 Year	The index measures the performance of short term government bonds issued by the US Treasury. It includes all publicly issued, US Treasury securities that have a remaining maturity of between 1 and 3 years, are non-convertible, are denominated in US dollars, are rated investment grade, are fixed rate, and have $250 million or more of outstanding face value.
US Long Treasuries	Bloomberg Barclays US Treasury Long	The index measures the performance of long term government bonds issued by the US Treasury. It includes all publicly issued, US Treasury securities that have a remaining maturity of 10 or more years, are non-convertible, are denominated in US dollars, are rated investment grade, are fixed rate, and have $250 million or more of outstanding face value.
International Fixed Income	Bloomberg Barclays Global Aggregate ex US	The index is a measure of global investment grade debt from twenty-three local currency markets. This multi-currency benchmark includes government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. The index also includes Eurodollar, Euro-Yen, and 144A Index-eligible securities, and debt from five local currency markets not tracked by the regional aggregate benchmarks (CLP, MXN, ZAR, ILS and TRY).
US Real Estate	Dow Jones US Select REIT Index	A broad measure of the performance of publicly traded US real estate securities, such as Real Estate Investment Trusts (REITs) and REIT-like securities.
Brazil	MSCI BRAZIL Index (USD)	The MSCI Brazil Index is designed to measure the performance of the large and mid-cap segments of the Brazilian market. With 53 constituents, the index covers about 85% of the Brazilian equity universe.
US Small Cap	Russell 2000	An unmanaged index consisting of those companies considered to represent the small-cap segment of the US equity market. It is a subset of the Russell 3000 Index based on market capitalization.

This report is for informational purposes only, and is not a solicitation, and should not be considered investment advice. The information in this report has been drawn from sources AssetMark believes to be reliable, but its accuracy is not guaranteed, and is subject to change. Investors seeking more information should contact their financial advisor. Financial advisors may seek more information by contacting AssetMark at 800-664-5345.

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Investments in mutual funds and exchange traded funds that hold equities, bonds, and other securities can decline significantly in response to adverse market conditions, company-specific events, changes in exchange rates, and domestic, international, economic, and political developments. Investments in bonds and fixed income related securities also involve market and interest rate risk (prices can decline, if interest rates increase), and default risk (an issuer being unable to repay principal and interest). High-yield bonds are generally subject to greater risk of default and volatility, than investment-grade bonds. Real estate investments are subject to credit and market risks, typically based on changes in interest rates and varied economic conditions. Investing in alternative investments, including managed futures, commodities, and currencies is not appropriate for all persons, as the risk of loss is substantial. Investments in futures involve market, counterparty, leverage, liquidity, interest rate, foreign currency, commodity, volatility, and other risks.

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C33188 | 10/2018 | EXP 01/31/2019
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