Equity Risk Monitors — May 15, 2022

Equity Risk Monitor Highlights | Week Ended 12 May 2022

  • The US becomes the biggest loser and riskiest so far in 2022
  • Global risk appetites continue to fall
  • Asset dispersion widens worldwide

The US becomes the biggest loser and riskiest so far in 2022

US stocks tumbled while volatility climbed last week, turning the US market into the biggest loser and the riskiest among all geographies tracked by Qontigo’s Equity Risk Monitors. The STOXX® USA 900 Index and Russell 2000 fell 6% and 7%, respectively, over the past five business days. With year-to-date losses of more than 20%, both US indices surpassed STOXX® China A 900’s 2022 decline of 19%.

The increase in both stock volatility and stock correlations pushed up forecasted risk for the STOXX® USA 900 and Russell 2000 indices last week, as measured by Axioma US All Cap (US4) and Small Cap (USSC4) fundamental short-horizon models, respectively. Risk for both indices climbed to levels not seen since the end of 2020, but it remained well below the peaks reached at the height of the coronavirus crisis in March 2020 or the Global Financial Crisis in December 2008.

See graph from the United States Equity Risk Monitor as of 12 May 2022:

Global risk appetites continue to fall

Last week’s returns to the global Market Sensitivity and Volatility style factors perpetuated the downward trend started in November of last year, indicating a further decline in risk appetites. Investors turned to low-beta and low-volatility stocks, shunning higher-beta and higher-volatility alternatives. Both style factors’ returns were four standard deviations below the expectations at the beginning of the week, which not only underscores the magnitude of the decline, but also quite likely had a major impact on active returns and risks.

The 12-month returns to Volatility (-17%) and Market Sensitivity (-7%) were the most negative among all factors in Axioma’s Worldwide medium-horizon fundamental model. Correspondingly, both style factors were positioned at the high ends of their one-year volatility ranges.

See graph from the Global Developed Markets Equity Risk Monitor  as of 12 May 2022:

Asset dispersion widens worldwide

The STOXX® Global 1800 Index lost more than 2% last week ending Thursday, driven down mainly by technology stocks. Interestingly, about 60% of companies in the global index still outpaced the index’s performance.

In addition, as stock indices declined, the spread between the winners and losers widened. Asset return dispersion—the cross-sectional standard deviation of five-day returns—has risen over the past couple of months. These two statistics reflect the divergence in returns across sectors and types of stocks, and suggest—as many active managers hope—that it was possible to outperform the declining market.

See graphs from the Global Developed Markets Equity Risk Monitor as of 12 May 2022:

For more insights and research from the Applied Research team, please click here.