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2nd Quarter 2018 Market Update

30 October 2019

Geremy van Arkel, CFA® | Principal

It takes sunlight an average of eight minutes and 20 seconds to travel from the Sun to the Earth. This means that the light exists long before we see it on the Earth’s surface. Very similarly, the stock market sees changes long before they hit the grassroots levels of the economy.  As a leading indicator, the stock market not only performs well for years prior to the economy hitting its full stride but, it can also deliver poor performance during the best of economic times – well before the rest of the world has figured out that change is on the horizon. Nine years into this current expansion, it appears that the economy is finally, after every conceivable method of stimulus has been exhausted, stretching its legs and living up to its potential.  Corporate earnings are experiencing growth, unemployment is approaching all-time lows, and long-stagnant wages appear to be growing.  On the ground, in the real world, everything feels solid, if not booming.  But what’s only now being felt on the ground is something the stock market sensed was coming years ago.

Yet investors have been quite nervous, to say the least.  Following the first quarter, which felt like a return to volatility, the second quarter has been characterized as having “late-stage economic cycle” apprehension.  Late-stage worries include, but are not limited to: inflation, rising interest rates, and declining rates of earnings growth.  While these storm clouds may very well be forming on the distant horizon, inflation remains in check, market-derived interest rates remain low, and earnings growth has only accelerated.

Defying all skeptics and ignoring all worrisome headlines, the trend remains your friend – in the U.S. at least.  U.S. stock returns for the quarter were exceptional, far outstripping the returns of all other asset classes.  This quarter, small-cap stocks stole the limelight from large-cap stocks, with small-cap indexes far outperforming the S&P 500® Index.  Small-cap stocks are expected to benefit from a strong economy and tax reform, but to be less impacted by global trade issues. Another noteworthy trend is that growth-oriented stocks continue to far outperform value stocks.  REITs also performed exceptionally, as interest rates didn’t rise as expected, or at all, and REIT prices played catch up.  While overall U.S. stock returns were strong for the quarter, returns across different sectors of the market were disparate, and many areas of the market were left behind.

The struggle is real, though, and the good news experienced domestically is not being mirrored abroad.  While the last five years have been characterized as coordinated in nature, and as ones reinforcing global growth, this quarter represents a crack in the continuum.  International stocks saw losses across the board, and emerging markets stocks lost nearly 8% for the quarter.  International stocks saw heat from three angles; a strong U.S. dollar, fears of a trade war, and a slightly deteriorating earnings outlook.

In the bond markets, too, the struggle continues. Overall, investment-grade bonds, as represented by the Barclays Aggregate Bond Index, lost a fraction of a percent for the quarter.  Contributing to that, high yield bonds, which reflect the debt of economically sensitive businesses, performed well for the quarter.  So, too, did long-term government bonds, which represent a bet against economic growth.  There remains a definite conundrum for fixed income investors.  On the one hand, the U.S. Federal Reserve Bank is raising short-term interest rates, which is a confirmation of a strong U.S. economy and possible inflationary pressure.  On the other, rising interest rates cannot be good for an economy that is heavily dependent on debt.  This contradiction in outlooks is evidenced by observing how flat the yield curve is currently; ten-year high-quality bonds yield about the same as two-year bonds, which has often been a harbinger of future economic weakness.

In general, performance for the quarter was defined by the percentage of assets held in U.S. growth-oriented stocks, because that was where the returns were.  This bode well for the Frontier Globally Diversified strategies, as most hold positions in U.S. growth stock funds.  On the other hand, positions in emerging markets funds were a detractor for the quarter and strategies that have benefited from this exposure over the past couple of years were impacted.  Going forward, all Frontier strategies remain conservatively positioned in terms of asset allocation and mutual fund selection.


Notes:
Past performance is no guarantee of future returns.  Performance discussed represents total returns that include income, realized and unrealized gains and losses. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. Before investing, consider investment objectives, risks, fees and expenses.
In reviewing any performance information presented, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance. We present performance information for short time periods because we understand that clients and potential Investors are interested in this information, however, we recommend against making any investment decisions based on short-term performance information. Performance should be considered in light of the market and economic conditions that prevailed at the time those results were generated.
Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. Frontier obtained some of the information provided herein from third party sources believed to be reliable but it is not guaranteed and Frontier does not warrant or guarantee the accuracy or completeness of such information. For any investment products mentioned herein, a complete description of their investment objectives, along with details of the risks and fees involved is contained in their respective prospectus and statement of additional information, which is available on their websites and should be read fully. This illustration does not constitute an endorsement.
Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision.
In reviewing the performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance. The performance information presented here covers different time periods. We present performance information for short time periods because we understand that clients and potential Investors are interested in this information, however, we recommend against making any investment decisions based on short-term performance information. For any investment products mentioned herein, a complete description of their investment objectives, along with details of the risks and fees involved is contained in their respective prospectus and statement of additional information, which is available on their websites and should be read fully.
It is generally not possible to invest directly in an index*. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index.
INDEX
INDEX DESCRIPTION
S&P 500
Represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ
MSCI All Country World ex US
The MSCI ACWI ex-USA is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI ex-USA consists of 44 country indices comprising 23 developed and 21 emerging market country indices. The developed market country indices included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom excluding the United States. The emerging market country indices included are: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
MSCI World
A free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of the following 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States.
Bloomberg Commodity Index
This is a broadly diversified index that allows investors to track commodity futures through a single, simple measure. The DJ-UBSCISM is composed of futures contracts on physical commodities.
HFRX Global*
Represents the hedge fund universe. It is comprised of all eligible hedge fund strategies; including but not limited to convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage.  The index is weighted based on the distribution of assets in the global hedge fund industry. It is a trade-able index of actual hedge funds.
Barclays US Aggregate Bond
Measures the performance of the U.S. investment grade bonds market. The securities must have at least one year remaining to maturity, must be denominated in U.S. dollars and must be fixed rate, nonconvertible and taxable.
Barclays Capital Long U.S. Treasury
Includes all publicly issued, U.S. Treasury securities that have a remaining maturity of 10 or more years, are rated investment grade, and have $250 million or more of outstanding face value
Citigroup 3-Month T-Bill
Represents the monthly return equivalents of yield averages for the last three 90-day T-Bill issues
Wilshire 5000 Total Market
The Wilshire 5000 Index is an unmanaged individually market capitalization weighted index that represents the total dollar value of all common stocks in the US for which daily pricing information is available. The index consists of over 7,000 US-headquartered and traded issues, including common stocks, REITs, and limited partnerships, and excluding bulletin board issues. Please note an investor cannot invest directly in an index.
Benchmark Composition. The Benchmarks for the Long-Term Growth, Growth & Income, Balanced, Conservative and Capital Preservation strategies are combinations of the Wilshire 5000 Total Market Index, MSCI All Country World ex US Index, Bloomberg Commodity Index, HFRX Global HF Index, Barclays US Aggregate Bond Index and 3-Month T-Bills.
The blends of the indices are currently:
Capital Preservation Bench
Conservative Bench
Balanced Bench
Growth & Income Bench
Long-Term Growth Bench
Wilshire 5000
10%
15%
30%
45%
50%
MSCI AC World ex US
0%
5%
15%
20%
30%
Bloomberg Commodity
15%
15%
10%
10%
10%
HFRX Global HF
25%
25%
20%
15%
10%
Barclays US Agg
40%
40%
25%
10%
0%
3M T-Bills
10%
0%
0%
0%
0%
Benchmarks for the Global Opportunities, Focused Opportunities, Absolute Return Plus, Absolute Return and Short-Term Reserve strategies are the MSCI World, S&P500®, HFRX Global HF, HFRX Absolute Return and Barclays Capital 1-5 Year US Treasury Indices, respectively. In the case of indices that include foreign securities, index returns are still presented on a total return basis but will be net of foreign taxes on income generated by these securities.
Frontier’s ADV Brochure is available at no charge by request at info@frontierasset.com or 307.673.5675.
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