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Equity Risk Monitors — July 25, 2023

Equity Risk Monitor Highlights | Week Ended July 21, 2023

  • Risk Still Increasing in Europe
  • Risk Decreasing Elsewhere but Spreads Persist
  • US Gains Spread the Wealth

Risk Still Increasing in Europe

We noted last week that market risk forecasts in Europe have been climbing, and that trend continues, although the increase is much more prominent in the short-horizon models than in the long horizon variants:

The return of the STOXX® 600 index last week was well within the forecast risk levels, however:

Nothing to get too excited about at this point, although it is interesting that in contrast, risk in other developed markets such as the United States and Japan continues to trend downward, at least in fundamental variants of the risk models:

Risk Decreasing Elsewhere but Spreads Persist

The spread between the statistical model and the fundamental model forecasts in the US is still quite stark, and continues to grow wider, despite the broadening of gains in the US market in July.

The below chart is not published with the Equity Risk Monitors but is available upon request:

We don’t necessarily expect the model’s forecast to “agree” with one another, but when we see rapid changes after periods of equilibrium, or a divergence in direction of forecasts over time, it is likely that the Statistical variants are capturing systematic co-movement in returns amongst cohorts of stocks that the structure of the fundamental models inherently miss.  See the Equity Risk Monitor commentary from the week of June 30 for more detail. 

US Gains Spread the Wealth

In the United States, we have seen the gains in the market become a bit more broad, with more than 50% of the members of the STOXX® USA 900 beating the index 3 out of the last 4 weeks:

In addition to this, Small Caps, as represented by the Russell 2000 Index, outperformed the large cap index thus far in July, after underperforming since mid-March:

The following two charts are not published in the Equity Risk Monitors but are available upon request: