Equity Risk Monitors — January 9, 2022

Equity Risk Monitor Highlights | Week Ended January 6, 2022

  • 2022’s rocky start pushes up US market risk
  • US Value and Earnings Yield extend gains as Growth plunges
  • Emerging Markets’ volatility remains below that of Developed Markets

2022’s rocky start pushes up US market risk

The US equity market started 2022 with losses at the end of a choppy week, while volatility continued to swell. After rising to new records on the first trading day of the year, US stock indices dropped abruptly, following the release of the Fed’s December meeting minutes, which indicated a potential rate increase sooner than previously anticipated. The STOXX USA 900 Index was down more than 2% for the week ending on Thursday. Short- and medium-horizon fundamental predicted risk for the STOXX USA 900 Index both rose and the two risk variants are now close to agreement at around 14.6%.

See graph from the United States Equity Risk Monitor as of 6 January 2022:

US Value and Earnings Yield extend gains as Growth plunges

Value, Earnings Yield and Growth all saw outsized swings in returns last week. Value and Earnings Yield’s positive returns were more than three standard deviations above, while Growth’s negative return was more than three standard deviations below, expectations at the beginning of the week, as measured by the US medium-horizon fundamental model.

Value and Earnings Yield continued the upward trend started last year, and are now the first and third best-performing fundamental factors, with 12-month returns of 6.5% and 4.4%, respectively. In contrast, Growth stagnated in recent months and showed a modest return of 2% for 2021. Despite its sharp downturn last week, Growth’s 12-month return remained positive at 1%. For more details on style factor performance in the fourth quarter and last year, please register for our Qontigo Insight 2021 Quarterly Equity Risk Review webinar on January 11.

See graph from the United States Equity Risk Monitor as of 6 January 2022:

Emerging Markets’ volatility remains below that of Developed Markets

Emerging Markets fared better than Developed Markets last week, remaining flat, in contrast with Developed Markets, which saw a weekly loss. The risk of both markets declined slightly last week, but Emerging Markets became even less risky than Developed Markets. The relative riskiness of Emerging vs. Developed Markets has plunged over the past three months, as the risk of the STOXX Emerging Markets 1500 fell in October-November and only rose in December, while the risk of the STOXX Global 1800 was on an upward trajectory during the entire period.

The ratio between the short-horizon risk of the two indices dropped from a high of 1.4 in early October to below 1 in early December, where it remained ever since. In other words, Emerging Markets were about 40% riskier than their developed counterparts last October, and now Emerging Markets are about 4% less risky. This is a fairly unusual development since Emerging Markets risk is on average about 20% higher than that of Developed Markets, as reflected by Axioma’s Emerging Market and Worldwide short-horizon fundamental models, respectively.

The chart below does not appear in our Equity Risk Monitors, but can be provided upon request:

For more insights and research from the Applied Research team, please click here.