Equity Risk Monitors — February 1, 2021

Equity Risk Monitor Highlights | Week Ended January 28, 2021

GameStop’s rally pushes Russell 2000’s specific risk to “dot-com bubble” levels; US Large Caps keep losing ground to Small Caps; The Chinese yuan strengthens against the greenback

Trading of highflying stocks pushes Russell 2000’s specific risk to “dot-com bubble” levels

The Russell 2000’s stock-specific risk spiked last week and is now at levels not seen since the dot-com bubble two decades ago, reflecting euphoric trading of GameStop, AMC and other highflying stocks. Specific risk rose throughout 2020 and last week’s jump pushed it above 2%. Specific risk is now 2.5 times higher than its level 12 months ago. While specific risk is only a small part of total benchmark risk, it is likely to figure far more prominently in actively managed portfolios.

Style risk also ticked up last week, with Liquidity seeing the biggest jump in volatility by far—over 50% in five business days—and it is now positioned at the high-end of its 12-month volatility range. In fact, we have not seen this level of volatility for the Liquidity style factor since the global financial crisis.

Risk levels for Size, Volatility and Leverage also increased last week, but only in the range of 4%-7%. Even as both specific and style risk spiked, total benchmark risk has drifted down over the past five business days, as reflected by Axioma’s medium-term fundamental US Small Cap model. Market risk has been the main driver of the decline in the total risk of the Russell 2000, both last week and for the year to date, while industry risk has been relatively flat over both periods. Again, active risk is likely to have been affected much more than benchmark risk by these increases.

See graphs from the US Small Cap Equity Risk Monitor as of 28 January 2021:

US Large Caps keep losing ground to Small Caps

US large-capitalization stocks lost more ground, after a tumultuous week resulting in small losses for the US market overall. The US Size style factor has tumbled since December, following vaccine announcements that lifted investors’ hopes for a return to “normalcy.”[1]

US Size recorded strong negative returns over past week and one-, three- and six-months (although all remained well within one standard deviation of their long-term averages). The factor posted a cumulative six-month return of close to -5%, but its 12-month return was still slightly positive. Size remained the most volatile factor in Axioma’s US fundamental medium-term horizon model.

[1]For insights on how close we are to a return to normalcy from a US sector perspective, i.e., where sectors that were profitable pre-pandemic may see a comeback, see our blog post Sector rotation: Just on pause or a hint of the “new normal”?

See graph from the United States Equity Risk Monitor as of 28 January 2021:

The Chinese yuan strengthens against the greenback

The Chinese yuan has been rising against the US dollar since June, as the Chinese economic recovery beat investors’ expectations. The People’s Bank of China’s move to withdraw 78 billion yuan from the Chinese financial system, together with the US Federal Reserve’s decision to maintain its easy money policies, further strengthened the Chinese currency against the greenback.

The yuan hit its highest level since June 2018, and was the best performing emerging market currency against the greenback, with a 12-month return of more than 10%. The yuan was positioned at the top of its 12-month return range against the US dollar last Thursday. The Chinese currency was also the second least risky, after the Taiwanese dollar, among major emerging currencies.

See graph from the China Equity Risk Monitor as of 28 January 2021: