Equity Risk Monitors — August 16, 2022

Equity Risk Monitor Highlights | Week Ended August 12, 2022

  • The market rallied and predicted risk sank along with Style risk
  • Statistical-Fundamental spread in Europe turns quite positive
  • All sectors rallied from the recent market trough, while Energy retains its high momentum exposure

The market rallied and predicted risk sank along with Style risk

As the market has continued its upward march that started in mid-June, volatility has fallen sharply from its June peak (albeit it still is twice as high as it was a year ago). Predicted volatility for the STOXX Global 1800 Index according to Axioma Worldwide short-horizon fundamental model is down about 4.5 percentage points, or more than 18% since the market started its recent rally. Medium-horizon risk has remained steady, although we expect to see that fall as well as it follows its short-horizon counterpart.

Despite the relative steadiness of that measurement, we note a substantial decrease in medium-horizon style risk since mid-June, which may be of particular interest to managers focused on managing that risk. Although the magnitude of the numbers is small, it is interesting that the correlation between Momentum and Growth has fallen during this period, whereas the correlation between Momentum and Value is up.

See charts from the STOXX Global 1800 Equity Risk Monitor as of 12 August 2022:

Statistical-Fundamental spread in Europe turns quite positive

The pattern of declining risk can be seen in most markets, and in most both the short-horizon fundamental and statistical variants have fallen to a similar extent. These forecasts for the STOXX Europe 600 Index look somewhat different than in other major markets, however. Here, fundamental risk has dropped much more than statistical, leaving a gap of 1.4 percentage points between the two.

While it is difficult to pinpoint the exact source of the difference, we note that the last time the short-horizon statistical-fundamental spread was this high was right after the invasion of Ukraine. From that point it steadily declined until June, when it reached -1.6%. It has risen since that point, so perhaps there is once again a geopolitical factor “seen” by the statistical model but not in the factor structure of the fundamental variant.

See chart from the STOXX Europe 600 Equity Risk Monitor as of 12 August 2022:

All sectors rallied from the recent market trough, while Energy retains its high momentum exposure

The US market, as defined by the STOXX USA 900 Index, is up almost 18% from its June 16 low through last Friday, and all market sectors have participated in the rally. Consumer Discretionary saw the biggest rebound, although it remains well below its 12-month peak — a shortfall only exceeded by that of Communications Services. Consumer Staples and Utilities returns have now turned positive for the last 12 months. Energy arguably remains the most interesting sector. It peaked before the other sectors and has gained only 5% in the rally. It still sports a 50% return over the last 12 months, however. Most notable is its continued high exposure to Medium-Term Momentum, which, although lower than it was at the market peak, is still far higher than that of any other sector. But that good Momentum exposure goes with a much higher Volatility exposure than any other sector and higher than it was at the market peak. So let the portfolio manager beware!

See charts from the STOXX USA 900 Equity Risk Monitor as of 12 August 2022: