U.S. Equities

Narrowing of market breadth

Market breadth made a relatively quick move from +0.5 standard deviation “broad” observation to approximately -1.5 standard deviations “narrow” by year-end.
February 2019

The S&P 500® finished the fourth quarter with a 13.5% loss, marking the worst quarter of performance since the financial crisis. This brought the calendar year return to -4.4%, ending a stretch of nine consecutive years with positive performance.


Fourth quarter observations

With consistent themes driving market returns for most of the year, momentum was the best performing factor in 2018. However, we have observed market leadership narrowing during the year, which accelerated greatly with December’s volatility. Market breadth, a metric that captures the concentration of leadership in the market, made a relatively quick move from a positive 0.5 standard deviation “broad” observation earlier in the year, to approximately -1.5 standard deviations “narrow” by year-end.

Market breadth charts 1 and 2 - Narrowing of market breadth

Historically, some of the most challenging enviornments for momentum factors have been in periods when market breadth has narrowed. Charts 3 and 4 illustrate the forward 12 month return of momentum factors against the corresponding level of market breadth. As the regression line on the scatter plots suggest, narrow market breadth has historically predicted periods of poor performance for momentum. More notably, some of the largest momentum corrections in history occurred when market breadth exceeded 2 standard deviations narrow.

Momentum factors market breadth charts 3 and 4 - Narrowing of market breadth


Risk-off sentiment was the most dominant theme driving stock returns, resulting in the outperformance of lower risk stocks in the market. This was evident at the sector level, where utilities was the only positive performing sector for the period. While risk-off was by far the most important factor, to a lesser extent, high-quality companies outperformed as companies with lower profitability lagged the market.

Factor performance charts - Narrowing of market breadth

Momentum slows

Returns from momentum were mixed during the fourth quarter’s market reversal. While the inflection point in the market may have suggested a momentum correction, factor underperformance in large cap was somewhat modest. Looking across the longer 12-month horizon, many themes that have previously been in favor (e.g., low-beta and quality) held strong during the quarter, which ultimately helped support momentum. This is particularly true in the U.S. small cap market where growth continued to outperform.


Macro uncertainty

The quarter’s sell-off was greatly influenced by instability at the macro level, which included continued trade tensions between the U.S. and China, concerns over tightening by the U.S. Federal Reserve, Brexit and the U.S. government shutdown. Consequently, stocks with sensitivities to macro-economic factors such as inflation, interest rates and oil were among some of the worst performers. This partially explains the continued underperformance of valuation factors, as following the outperformance of growth and lower risk, many attractively valued stocks also share cyclical exposure.

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The S&P 500® Index is a capitalization-weighted index of 500 large-cap U.S. stocks.
The Russell 1000® Index is an index of approximately 1,000 of the largest companies in the U.S. equity market.
The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe.
Investments cannot be made in an index.
Beta is a measure of a portfolio’s volatility. Statistically, beta is the covariance of the portfolio in relation to the market. A beta of 1.00 implies perfect historical correlation of movement with the market. A higher beta manager will rise and fall more rapidly than the market, whereas a lower beta manager will rise and fall slower.

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