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Equity Risk Monitors — August 14, 2023

Equity Risk Monitor Highlights | Week Ended August 11, 2023

  • Risk continues to fall in the US, but has started to rise elsewhere
  • Trading volume finally starts to pick up, but mainly in the US
  • After a tough second quarter, Profitability has come back strong

Risk continues to fall in the US, but has started to rise elsewhere

The contrast in the direction of risk between the US and Developed Markets ex-US continues. Short-horizon fundamental risk ticked up ever-so-slightly for the week ended August 9, 2023 for the STOXX® US, although the level is less than half the one-year high reached last November. Risk has also been down over the last month. Interestingly, the gap between the short-horizon statistical and fundamental forecasts narrowed as the statistical variant has plunged of late. As we surmised the widening gap over the past few months may have been the result of the narrow market being led up by a small number of names, perhaps the same thing is happening in reverse. Not surprisingly, the gap for the medium-horizon variants has continued to widen, as the short-horizon models tend to lead their medium-horizon counterparts.

We also see that the decrease in fundamental risk over the past month was driven solely by the lower correlations among stocks, while individual stock volatility has not changed. The decomposition per the factor model shows that factor correlations have remained steady, while factor volatility has fallen.

At the same time, risk estimates for the STOXX® International Developed Markets index have increased in the last month, and the statistical-fundamental spread at both horizons remained negative. The risk increase was the result of both higher asset correlations and stock volatility. From the standpoint of the factor model both factor volatility and correlations have increased (and keep in mind that the Axioma Developed Markets ex-US model has country and currency factors that the above-mentioned US model does not, and it is very likely that they drove the factor volatility increase).

See graphs from the United States Equity Risk Monitor of 11 August 2023:

STOXX US – Predicted Risk

Risk Change Composition – Dense Matrix – STOXX US

See graphs from the Developed Markets ex-US Risk Monitor of 11 August 2023:

STOXX International Developed Markets – Predicted Risk

Risk Change Composition – Factor Model – STOXX International Developed Markets

Risk Change Composition –Dense Matrix – STOXX International Developed Markets

Trading volume finally starts to pick up, but mainly in the US

Trading volume in the US has picked up. The 20-day average volume for the STOXX US as of August 11 was about 14% higher than it was a year ago, and about 30% above the recent low in April 2023. For months we were saying that the low volume may have been indicating that investors were sitting out the rally and/or had moved assets into bonds. The recent increase in volume suggests they are coming back to US equities. The biggest increase in recent volume as compared with the average over the last year came in Information Technology and Communications Services, but we also see increases in most sectors, including Consumer Discretionary, Financials, Health Care and Industrials.

Once again, we contrast the US with other developed markets and see that outside the US trading volume has increased a bit more than 10% from a year ago, mirroring the rise in the market, so we do not see “added” volume that we observed in the US. In addition, we see a similar increase as in the US in Information Technology and Consumer Discretionary’ ADV, but recent volume is lower than average in most other sectors.

See graphs from the United States Equity Risk Monitor of 11 August 2023:

STOXX US – Rolling ADV (USD Billions)

STOXX US – ADV by Sector

See graphs from the Developed Markets ex-US Risk Monitor of 11 August 2023:

STOXX International Developed Markets – Rolling ADV (USD Billions)

STOXX International Developed Markets – ADV by Sector

After a tough second quarter, Profitability has come back strong

The Profitability factor struggled in a number of regions last quarter. Its quarterly return of -0.57% in the Worldwide (WW4) model was the lowest of any region, as well as the most negative return for any of the factors in WW4. However, the factor has rebounded strongly so far in the third quarter, with a return of 0.75%. For the last four weeks, the return of 0.79% is almost three standard deviations above the long-term average. Although Profitability’s performance is not the highest among all the factors, its low volatility means that its return is the most “outsized” when normalized by risk. The good performance for the WW4 model is largely the result of a gain of more than 2.6% in the same four weeks, which is more than three standard deviations above the long-term average, in the US. The factor’s return in other regions is more lackluster, or even negative in Asia and Emerging Markets.

See graph from the Developed Markets Risk Monitor of 11 August 2023:

Axioma Worldwide Model Style Factor Returns by Period

Axioma Worldwide Model Style Factor Returns Q3 vs. Q2

The following chart is not included in the risk monitors, but is available on request