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Equity Risk Monitors — August 30, 2022

Equity Risk Monitor Highlights | Week Ended August 26, 2022

  • The market intercept says it all
  • Style factors stay on trend
  • Broad based measures point to increased concentration

The market intercept says it all

In the US as well as globally it was an up and down week that ended up sharply down Friday after the US Fed Chairman Jay Powell made it abundantly clear where the central bank’s priorities are, and the prospects of easier rates in the 2nd half of 2023 faded from view. 

Parsing the STOXX USA 900 returns via the Axioma US4-MH factor model showed the market intercept factor capturing 383 of the 386 basis points of the index’s excess return:

In fact, the only notable divergence from the index showed up in the continuing tension between the Energy  and  Technology sectors, as the Energy related industries had a cumulative contribution of +22 bps while the Technology Industry factors had -20 bps contribution:

No other group of factors had any meaningful contribution.  This is consistent with the theme of higher rates forcing higher multiple (expensive) stocks to be re-valued downwards, explaining much of the continued leak of value from the technology sector.  In contrast, even though short-term pressure on commodities has eased over the summer, apparent anticipation of continued stress in global energy markets continues to push these names higher.

Style factors stay on trend

In absolute terms, the factor returns for style factors were somewhat of a mixed bag but leave us with some interesting reinforcements of current trends:

Note that both Market Sensitivity and Volatility factors were quite strong in the middle of the week as many appeared to anticipate that the expected lower PCE (Personal Consumption Expenditure Index, print would lead to a more dovish stance by the fed; when the opposite was proffered by Chairman Powell both sold off on Friday the 26th but did not lead the broad market downwards.  This is consistent with the last few months where these factors have been strong coming off the bear market lows as they usually are. The fact that they did not lead the way Friday in Friday’s selloff may mean that we are not going to see another rapid downward trend from here in the near future.  Also, Momentum bucked the trend and was up on Friday even as the broad market fell sharply.  This is likely due to the positive Momentum exposure of the Energy Sector as a whole (1.68!) as of Friday, by far the highest of any sector to any Style factor:

In addition, the fundamental style factors stayed true to recent trends, with the exception of Profitability:

Earnings Yield, Value, and even Growth were modestly higher on the week, but Profitability was down in a rather uncharacteristically large weekly move of -75 bps.  Both Energy and Technology have relatively high exposures to Profitability, which has suffered during this recovery from market bottoms in June.

Broad based measures point to increased concentration

On a broader, non-factor related front, dispersion continued to decrease in the US, and while it held steady globally, asset correlation readings increased markedly everywhere:

While changes in overall index risk were small over the week despite Friday’s selloff, the “dense matrix” change in risk indicator shows all of the increase due to increased correlation:

This helps explain why the market factor captured almost all of last week’s returns, as dispersion appears to decrease in asset returns and factor returns.