In August, U.S. assets, both in equity and fixed income markets, were preferred by investors over other regions, which continued to suffer from political turmoil generating volatility in their capital markets. While global equities appreciated 1.2% in the period , this was largely driven by the U.S. stock market (+3.3%), while international-developed and emerging market stocks were both down, -1.7% and -0.5%, respectively. More specifically, investors were deeply concerned with Italian equities (-9.9%), driven by concerns over the Italian budget deficit and economic growth. As in the past, contagion fears have affected Spain (-6.3%) and Greece (-10.3%). In emerging markets, trade tensions and tariff threats between the U.S. and China continued to affect Chinese stocks far more than in the U.S. – Chinese equities declined 3.8% in August.
Following the February volatility spike and resulting correction, U.S. equities have appreciated in each of the five months since April – exhibiting far greater consistency than other regions. Reflecting this consistency, the VIX Index averaged 12.6 during the month, substantially below its long term historical average. Recent U.S. equity performance was driven in part by corporate earnings growth, which continued to beat consensus estimates. Furthermore, U.S. consumer spending, employment and inflation data were all positive and supportive of economic growth.
Fixed income markets exhibited a similar “risk off” story. In particular, emerging market bonds sold off (-2.0%) substantially more than other regions. In particular, political and economic concerns in Turkey and Italy led to substantial fixed income volatility in those markets. Global fixed income was roughly flat (+0.1%) and U.S. investment grade fixed income was up 0.6%, in part driven by consistent messaging from the U.S. Fed regarding its timeline for key rate hikes.
 Unless otherwise noted, asset classes herein refer to the specific indexes referenced at the end of this commentary. All returns and levels are on the U.S. market close.
Short-Term Market Outlook
Our economic outlook at the end of August furthered a negative trend. This positioning was largely driven by a substantial pullback in our measurement of global trade, which we measure through a global shipping price proxy. Over the past few months, we have observed this measurement moving from strong growth, to modest growth, and most recently to contraction. The economic outlook is further diminished by negative manufacturing and building data.
QS Leading Economic Indicator
QS Leading Economic Indicator Index is a proprietary composite of economic data that QS Investors believes are significant in determining financial and economic conditions in the U.S.
Despite the impact of the negative economic outlook, we remain modestly bullish on equities due to our outlook on valuation, a slight pullback in interest rate trend, and improving leverage conditions. We believe international equities are positioned to outperform U.S. stocks. Four out of five factors in our tactical model favor international equities, including yield curve steepness (the U.S. yield curve continued to flatten in August), options market data, valuation, and volatility. Only price momentum was in favor of U.S. stocks.
Asset Class Preference
Asset Class Preferences are based on QS Investors proprietary quantitative factor models. These rules-based financial models use a combination of indicators that analyze asset valuations, investor sentiment, and the broad economy.
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Global Equities represented by the MSCI ACWI Gross Total Return Local Index; Emerging Market Equities represented by the MSCI EM Gross Total Return Local Index; International Equities represented by the MSCI EAFE Gross Total Return Local Index; U.S. Equities represented by the S&P 500 Total Return Index; Chinese Equities represented by MSCI China Net Total Return USD Index; U.S. Dollar (USD)represented by the Bloomberg Dollar Spot Index; Global Fixed Income represented by the Bloomberg Barclays Global Agg Total Return Index Value Unhedged USD; U.S. Fixed Income represented by the Bloomberg Barclays U.S. Agg Total Return Index Value Unhedged USD; Emerging Market Fixed Income represented by J.P. Morgan EMBI Global Core USD Index; Italy Equities represented by MSCI Italy Index (MXIT Index); Spain Equities represented by MSCI Spain Index (MXES Index); Greece Equities represented by MSCI Greece Index (MXGR Index).
QSCR 18242 (September 2018)