Equity Risk Monitors — July 8, 2022

Equity Risk Monitor Highlights | Week Ended July 7, 2022

  • One-month returns show a course reversal for US Value, and a continuation of US Momentum’s downturn, while Exchange Rate Sensitivity experiences outsized returns as well
  • Trading volume has fallen, but remains higher than year-ago levels
  • Style factor volatility is once again rising in many regions

One-month returns show a course reversal for US Value, and a continuation of US Momentum’s downturn, while Exchange Rate Sensitivity experiences outsized returns as well

In the month ended Thursday, July 7, Value’s return was -2.46%, which is more than two standard deviations below its long-term average monthly return, with the denominator defined by the expected volatility from the US4 medium-horizon model at the beginning of the period. This sharp downturn in fortune has resulted in just slightly positive three- and six-months returns, although 12-month performance still looks strong. Value’s monthly return in most other regions was negative as well, although no other regions breached that two-standard deviation barrier.

At the same time, Momentum in the US has continued the slide that started in April, and its -3.12% return over the past month was also two standard deviations below average. Like Value, Momentum has had a tough month in most regions. This positive correlation in Value and Momentum performance is unusual.

Another factor that has experienced returns that were two or three standard deviations from a long-term average that is close to zero is Exchange Rate Sensitivity. This factor measures how a stock moves with its home currency — a positive exposure means the stock is likely to go up as its currency strengthens (as an importer might). The factor return reflects the recent strength in the dollar versus many other currencies, unusually positive in the US and extremely negative in other regions. The return breached the two-standard deviation barrier in the US (both all-cap and small-cap), UK, Europe, Australia and Developed Markets ex-US.

See graph from the US Equity Risk Monitor as of July 7, 2022:

Trading volume has fallen, but remains higher than year-ago levels

Average daily trading volume soared to unusually high levels earlier this year as the market fell but has fallen dramatically since then. The figure for the STOXX Global 1800 as of Thursday, July 7 was down almost 30% from the peak reached in mid-February of this year. However, Thursday’s reading was about 2% higher than the level of one year ago, and about the same versus two years ago. To us, this indicates that volume levels reflect the typical summer trading lull, and the drop-off seems dramatic only because of the heightened activity earlier this year, rather than being an indication of unusual investor reluctance to trade.

See graph from the Global Equity Risk Monitor as of July 7, 2022:

Style factor volatility is once again rising in many regions

Although aggregate style volatility has fallen, many style factors’ medium-horizon volatility remains at or near a 12-month high. As noted above, Momentum and Exchange Rate Sensitivity have seen returns of unusually large magnitude recently, and we have also noted the outsized performance of Market Sensitivity and Volatility. These factors are joined by Profitability and Size, with predicted volatility at or near the high end of their 12-month ranges. Interestingly, Value’s volatility remains near the low end of its 12-month range. Value’s volatility climbed well above its long-term average about two years ago and has remained elevated since then. So, while it is near the low end of its 12-month range, it is still high relative to a longer history.

The graph below shows results for the Worldwide model, but other country and regional model charts look very similar. Investors tilting on these factors may be seeing active risk increasing as a result of this higher factor volatility.

See graph from the Global Equity Risk Monitor as of July 7, 2022: