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Third Quarter in U.S. Stock Funds--A Mixed Bag

Investors remained cautiously optimistic despite looming threats and rocky markets.

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The prominent investment themes from the second quarter leaked into the third, producing volatile trading but little movement. The U.S.-China trade conflict captured investors’ attentions and seesawed markets, while the Federal Reserve lowered rates for the second time this year in September. That, combined with slowing global economic growth, produced an inverted yield curve, which can be a harbinger of economic downturns. In all, the S&P 500 pushed 1.7% higher for the quarter through Sept. 26, while the smaller-cap Russell 2000 Index lost 1.8%. And despite the muted returns, domestic equities outperformed their foreign counterparts yet again. The Russell 3000 Index has now beaten the MSCI ACWI ex USA Index in nearly two thirds of the past 40 quarters.

Two other broad trends continued in the third quarter, with the Russell 1000 Growth Index beating its value equivalent and large-cap benchmarks besting their smaller peers. Morningstar Category averages, however, exhibited different tendencies. The average large-value fund gained 1.3%, topping the large-growth norm by more than a percentage point and even the Russell 1000 Value Index by 11 basis points. Sector allocations may explain some of the divergence. The average large-growth strategy owned less of the strong-performing technology sector relative to the bogy, while the average value fund owned more tech. Higher yields also bolstered value strategies. Large-blend’s 1.5% return led the nine equity Morningstar Style Box categories, while small-growth lagged, losing 3.5%.

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Tom Nations, CFP® does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.