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Equity Risk Monitors — January 18, 2024

Equity Risk Monitor Highlights | Week Ended January 12, 2024

The past week saw a complete reversal of the first week of 2024, with the US and other Developed markets up sharply.  Within Developed Markets, the Medium-Term Momentum factor was particularly strong. Simultaneously,  the Size factor, which had an exceptionally positive 2023 may have begun to reverse (Japan excepted, once again).

The following Chart is not published in Equity Risk Monitors but is available upon request: 

In the US, large cap stocks did not do badly, nor did small-caps outperform large caps. In fact, it was “the usual suspects” leading the STOXX World US last week- out of the “Magnificent 7” only Tesla has a negative return (-7.8%).    The Russell 2000 small-cap index was essentially flat while the STOXX World US index was up nearly 2%.  If it wasn’t Size that drove the underperformance of Small-Caps, what was it? 

The following table is not published in the Equity Risk Monitors, but is available upon request:

Active Return Decomposition- Russell 2000 vs. STOXX World US, week ended 12 Jan 2024- US4-MH Risk Model 

According to the US4 model,   the contribution from Volatility, Market Sensitivity, and Momentum along with a large underweight to IT explains it, and outweighs the large positive Size contribution- in other words large caps did not outperform because they are large, but largely in spite of it.  

As much of a good week as it was for US indices, only 1/3 of the index constituents outperformed.

See Chart 24, US Equity Risk Monitor, 12 Jan 2024: 

However, Dispersion overall was in the normal range and the Diversification ratio for the index, which had fallen considerably in the middle of the 4th quarter has rebounded somewhat to 3.16 after bening as low as 3.04 in mid December.  This means that the difference between the Total Variance of the index and the weighted average of the index constituents’ variances is getting larger, implying lower correlations amongst index constituents. 

See Charts 23 & 22, US Equity Risk Monitor 12 Jan 2024: