Q2 2019 Market Commentary

Highlights

• Markets rise, but volatility reemerges as macro business risks linger
• Cap-weighted indices under pressure as DoJ investigates Big Tech
• Healthcare in the cross hairs of political posturing
• International markets vulnerable as global economic uncertainty rises
• Smaller companies lag

Volatility persists in Q2 as macro business risks linger

Following a constructive April (S&P 500 +4.0%), the lingering trade dispute and interest rate uncertainty drove markets lower in May (S&P 500 -6.4%). The Fed reassured markets that rates would not rise imminently and that the most likely direction for the Fed Funds rate this year would in fact be lower, seeing markets fully recover in June (S&P 500 +7.0%, its strongest June since 1955). By comparison, the Syntax Stratified LargeCap Index rose broadly in line with its cap-weighted counterpart in Q2 (+3.5% vs +4.3%), leaving the Stratified LargeCap Index marginally higher than the S&P 500 for the year (18.7% versus 18.5% through the end of Q2).

The Stratified LargeCap Index continues to outperform YTD

Active Business Risk Alert: DOJ investigates Big Tech causing largest one-day outperformance for SYLC since the DotCom bubble

At the start of June, the US regulators at the Department of Justice and the Federal Trade Commission announced progress towards launching anti-trust investigations into Apple, Amazon, Alphabet and Facebook. These four companies comprised 10.9% of the S&P 500 Index on June 3rd as news of this announcement saw the aggregate index fall -0.3%. The Syntax Stratified LargeCap Index, which has a combined 0.7% weight in Apple, Amazon, Alphabet and Facebook on that date, rose 0.6%. This was the largest one-day outperformance since the collapse of the DotCom bubble in March 2000. The oversized exposure to mega cap tech in many market cap-weighted indices remains one of our key concerns and we view the recent DoJ announcement as another warning signal.

Weights of Apple, Amazon, Alphabet and Facebook

Active Business Risk Alert: Healthcare remains in the cross hairs of political posturing

Healthcare has been the worst performing FIS sector this year, appreciating only 6.8% and underperforming the S&P 500 by 11.7%. The sector has suffered political headwinds with both parties speaking out against high drugs prices and health care services being widely discussed at the Democratic presidential primary debates. The S&P 500 is highly exposed to Big Pharma, with a 5.2% allocation to pharmaceuticals and an additional 2.3% allocation to diversified drug and device companies at the end of Q2. Year to date, the Stratified Healthcare sector has outperformed its cap-weighted equivalent by 2.4% (9.2% Stratified vs 6.8% Cap weighted), demonstrating the value in diversifying business risk even in rising markets.

Global economic uncertainty calls for a more diversified approach

International markets rose in Q2 (MSCI EAFE +4.0%), amidst a backdrop of global trade and interest rate concerns. With no clarity on trade and widespread negative interest rates (Japanese, German, French and Swiss 10-year bonds all trading at negative yields), economic uncertainty has sharply increased to near its yearend 2018 peak, high above levels seen in the past decade.

International markets are highly correlated with domestic markets

Global Economic Policy Uncertainty Index is near multi-year highs

MidCap struggles after a strong Q1 2019

Similar to the S&P 500, the mid cap universe had a volatile second quarter. A strong April and June bookended a painful May, where 331 of 400 securities had negative returns. The S&P MidCap 400 finished the quarter up 3.0%, while the Stratified MidCap index rose 1.6%. The Stratified MidCap Index allocated greater weight than the cap-weighted index in the Consumer and Healthcare sectors. The Household and Personal Products (-11.7% for Q2), Pharmaceuticals (-9.3%) and Medical Devices groups (-17.1%) all caused a headwind for relative performance. A lower weight in Commercial Information (+7.7%) for the Stratified MidCap index also negatively impacted relative performance. This relative underperformance was offset by outperformance in the Energy sector, driven by lower exposure to poor-performing upstream energy companies, where the largest companies had significantly worse performance than their smaller peers.

Disclaimers

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only.

The Syntax Stratified LargeCap Index, Syntax Stratified MidCap Index, and Syntax Europe & Asia Developed Markets (“SEADM”) Index are the property of Syntax, LLC, which has contracted with S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC) to calculate and maintain the Indices. The Indices are not sponsored by S&P Dow Jones Indices or its affiliates or its third party licensors (collectively, “S&P Dow Jones Indices”). S&P Dow Jones Indices will not be liable for any errors or omissions in calculating the Index. “Calculated by S&P Dow Jones Indices” and the related stylized mark(s) are service marks of S&P Dow Jones Indices and have been licensed for use by Syntax, LLC. S&P® is a registered trademark of Standard & Poor's Financial Services LLC (“SPFS"), and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). The MSCI EAFE Index was used by Syntax, LLC as the reference universe for selection of the companies included in the SEADM Index. MSCI does not in any way sponsor, support, promote or endorse the Index. MSCI was not and is not involved in any way in the creation, calculation, maintenance or review of the Index. The MSCI EAFE Index was provided on an “as is” basis. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating the MSCI EAFE Index (collectively, the “MSCI Parties”) expressly disclaim all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non‐infringement, merchantability and fitness for a particular purpose). Without limiting any of the foregoing, in no event shall any of the MSCI Parties have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages in connection with the MSCI EAFE Index or the SEADM Index. Prior to March 19, 2018, the SEADM Index was calculate by NYSE. Sector subsets of the Syntax Stratified LargeCap, Syntax Stratified MidCap, and SEADM Indices are calculated using model performance generated in FactSet, and as such may differ from index calculations performed by S&P Dow Jones Indices. Syntax®, Stratified®, Stratified Indices®, Stratified-Weight™, Stratified Benchmark Indices™, Stratified Sector Indices™, Stratified Thematic Indices™, and Locus® are trademarks or registered trademarks of Syntax, LLC and its affiliate Locus LP. FactSet® is a registered trademark of FactSet Research Systems, Inc.

Index performance does not represent actual fund or portfolio performance and such performance does not reflect the actual investment experience of any investor. An investor cannot invest directly in an index. In addition, the results actual investors might have achieved would have differed from those shown because of differences in the timing, amounts of their investments, and fees and expenses associated with an investment in a portfolio invested in accordance with an index. None of the Syntax Indices or the benchmark indices portrayed herein charge management fees or incur brokerage expenses, and no such fees or expenses were deducted from the performance shown; provided, however that the returns of any investment portfolio invested in accordance with such indices would be net of such fees and expenses. Additionally, none of such indices lend securities, and no revenues from securities lending were added to the performance shown.  

The S&P 500® Index is an unmanaged index considered representative of the US mid- and large-cap stock market. The MSCI EAFE Index is an unmanaged index considered representative of the European, Australian, and East Asian large-cap stock market. Benchmark data for the S&P 500 and S&P MidCap 400 Indices are provided by S&P Dow Jones through FactSet®. Benchmark data for the MSCI EAFE index is provided by MSCI through FactSet.

This document is for informational purposes only and is not intended to be, nor should it be construed or used as an offer to sell, or a solicitation of any offer to buy, any security. Additionally, the information herein is not intended to provide, and should not be relied upon for, legal advice or investment recommendations. You should make an independent investigation of the matters described herein, including consulting your own advisors on the matters discussed herein. In addition, certain information contained in this factsheet has been obtained from published and non-published sources prepared by other parties, which in certain cases have not been updated through the date hereof.  While such information is believed to be reliable for the purpose used in this factsheet, such information has not been independently verified by Syntax and Syntax does not assume any responsibility for the accuracy or completeness of such information. Syntax LLC, its affiliates and their independent providers are not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein.

Certain information contained in this presentation is non-public, proprietary and highly confidential and is being submitted to selected recipients only. Accordingly, by accepting and using this factsheet, you will be deemed to agree not to disclose any information contained herein except as may be required by law. This factsheet and the information herein may not be reproduced (in whole or in part), distributed or transmitted to any other person without the prior written consent of Syntax. Distribution of Syntax data and the use of Syntax indices to create financial products requires a license with Syntax and/or its licensors. Investments are not FDIC insured, may lose value and have no bank guarantee.