3Q:2018 Quarterly Update – Volatility Up, Yet Growth Persists

It was a strong quarter for equities. Stocks scaled a wall of worry in Q3, driven by a mix of renewed synchronized global economic growth, robust Q2 earnings growth and strong Q3 forecasts. Companies found innovative ways to compete and excel.

Credit markets faced challenges. US Treasury yields rose across the curve, reflecting increases in potential growth and additional rate hikes based on the Fed’s telegraphed intention to maintain its interest-rate and balance-sheet normalization process. US corporate bond performance was mixed as the yield curve flattened.

Convertibles continued to rally. Strength in their underlying equities and tight corporate credit spreads helped convertibles deliver modest gains, led by healthcare and tech issues. The primary convertible market remained strong.

Our strategies outperformed for the quarter (see page 3 of PDF). All our strategy composites generated positive returns for Q3 2018. Most meaningfully outperformed their benchmarks.

Equities are attractive—but not without risk. While we see further upside driven by company fundamentals, the US economic expansion and upward revisions of earnings and revenue estimates, we’re also aware that the expansion cycle is in its later stages—meaning that growth and valuations are more vulnerable to changing investor sentiment or potential external shocks.

As we write in early October, stocks have already taken a hit from jitters about rising yields across the curve, China and the potential for a US-China trade war to hamper US earnings growth. We wouldn’t be surprised by additional choppiness in Q4 (particularly in the runup to and aftermath of the November US midterm elections), but expect markets to weather the storm and enter 2019 with fundamentals in good shape given the ongoing strength in secular growth.