US small-cap stocks close in on their larger counterparts; Value sees a strong reversal—except in Japan; The greenback continues to weaken
US small-cap stocks close in on their larger counterparts
Despite an increase in coronavirus cases in the US, with some states imposing fresh lockdown measures, the US market rallied to new heights last week, emboldened by positive vaccine news and hopes for a stimulus package. US small caps saw a much larger spike than large caps, with the Russell 2000 index gaining 4%, while the STOXX USA 900 index rose only 0.4% over the five days ending Thursday. The Russell 2000’s weekly return remained within the one standard deviation of the expectation at the beginning of the week, as measured by Axioma’s US Small Cap short-horizon fundamental model.
However, the Russell 2000’s one-month and three-month returns were well above the one standard deviation of the expectations at the beginning of each respective period. At the end of October, US Small Caps were posting a negative year-to-date return of -7%, lagging Large Caps by 10 percentage points. But the accelerated small-cap rally in November and now December brought the Russell 2000’s year-to-date return to 15% last week, only one percentage point below that of the STOXX USA 900 index. Still, Small Caps were more than 35% riskier than their larger counterparts, as measured by Axioma’s US Small Cap and All Cap short-horizon fundamental models, respectively.
See graph from the US Small Cap Risk Monitor as of 10 December 2020:
Value sees a strong reversal—except in Japan
Value, which has been out of favor for most of the year, saw a recent comeback around the globe. Value recorded strong positive one-month returns in all of Axioma’s medium-term fundamental models, except Japan. Positive vaccine news gave a shot of confidence to most markets, but investors remained more skeptical in Japan, which did not see the same style factor rotation as did the rest of the world. For more details on market sentiment, see Olivier d’Assier’s weekly ROOF Highlights.
Despite the recent reversal, only Canada, UK, Asia Pacific ex-Japan and Emerging Markets have recorded positive year-to-date returns for Value. Value’s performance in Japan of -4% was the second worst after Australia’s of -7%, among all regions Axioma models track closely.
See graph from the Global Developed Markets Equity Risk Monitor as of 10 December 2020:
See graph from the Japan Equity Risk Monitor as of 10 December 2020:
The greenback continues to weaken
Major developed currencies have risen against the US dollar in recent months, and most are now pushing up against the high-ends of their one-year return ranges against the greenback. As the US dollar continues to depreciate, the Swedish krona, Swiss franc and euro posted the largest one-year returns—around 10%. All major developed currencies saw positive returns for the past 12 months, with the British pound recording the lowest gain, held down by the UK and the European Union Brexit negotiations. In terms of risk, the Singapore dollar was the least volatile and the Norwegian krone was the most volatile among developed currencies last Thursday, as measured by Axioma’s Worldwide short-horizon fundamental model.
See graph from the Equity Risk Monitors as of 10 December 2020: