Equity Risk Monitors — July 12, 2021

Equity Risk Monitor Highlights | Week Ended July 8, 2021

  • US investors show shift in style factor preferences
  • The volatility of Volatility remains volatile
  • Rising market on lower volume may signal a lack of conviction

US investors show shift in style factor preferences

Factor returns for the one- and three-month periods have reversed course from earlier this year in some cases, as returns to Market Sensitivity and especially Volatility were negative, while low Leverage was slightly rewarded and the months-long preference for smaller names (noted in last week’s Equity Highlights) reverted as the return to Size became positive. Momentum has continued to struggle, and Value has now joined Momentum in falling out of favor. Yet the market continued to advance over this period and overall volatility fell. These mixed messages are reflected in the neutral market sentiment observed by Olivier d’Assier in his ROOF Highlights this week, but may also reflect a subtle move toward a preference for safer names, a trend we have not seen for some time.

See graph from the US Equity Risk Monitor as of July 8, 2021:

The volatility of Volatility remains volatile

A year ago, risk remained unusually high, with many style factors experiencing risk levels among the highest in the history of the fundamental risk models. Since then, according to the Worldwide model, market, country, currency, and industry risk have all plummeted. And although style risk has remained roughly flat versus a year ago, some factors continue to see moderate-to-high risk levels. Most notably, the Volatility factor remains at the high end of its 12-month risk range in a number of models, suggesting that managers using this factor in their processes, either directly or indirectly (for example, in a minimum variance portfolio), may be seeing higher risk levels than they might expect.

See graph from the Global Equity Risk Monitor as of July 8, 2021:

Rising market on lower volume may signal a lack of conviction

Trading volume surged in the first four months of this year, but plunged in May and has remained low. To be sure, the current level of trading volume could reflect the typical “summer trading doldrums,” although the drop preceded the start of summer. It is possible that while equity investors seem to be ignoring the specter of higher inflation and interest rates (or believe that the indication of a stronger economy is a positive for markets, even if central banks feel the need to tighten policy), they are doing so with less conviction, driving the market higher, but on lower volume.

See graph from the Global Equity Risk Monitor as of July 8, 2021: