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Equity Risk Monitors — June 14, 2021

Equity Risk Monitor Highlights | Week Ended June 10, 2021

  • Info Tech’s comeback pushes US market to new records
  • Asset correlations plummet worldwide
  • Meme stocks drive up Russell 2000 trading volume

Info Tech’s comeback pushes US market to new records

Technology stocks led the rise in the US market last week, with many US indices hitting new records amid increased optimism about a strong post-pandemic recovery, despite fears of inflation. Information Technology has been rising since mid-May, after struggling earlier in the year. At the beginning of May, Info Tech was the only US sector among the 11 sectors in the STOXX USA 900 index to record a negative cumulative year-to-date return. The sector’s recent comeback not only pushed its year-to-date return into positive territory, but the sector was no longer the worst performing sector year-to-date as of last week.

Info Tech’s year-to-date return of 7% was among the lowest sector returns in 2021, especially when compared with that of the top-performing sector—Energy—which is up 39% this year. But Info Tech’s contribution to the STOXX USA 900 index’s year-to-date return was second only to that of Financials, given its large weight in the US index. Info Tech represented about 28% of the index last Thursday—the same as it did one year ago—though the sector’s contribution to index risk significantly surpassed its weight and contribution-to-risk level of a year ago, when the risk contribution was lower than its weight.

See graph from the US Equity Risk Monitor as of 10 June 2021:

Asset correlations plummet worldwide

Asset correlations around the globe tanked in recent weeks, contributing to the overall decline in risk. The median pairwise realized 20-day asset correlation fell last week in all regions Axioma tracks closely, except China. However, China saw large declines in correlations in the prior two months, and last week’s small increase still positioned its correlations among the lowest, compared with other geographies. This low correlation environment should provide active managers with more opportunities to add value to their investment processes, since stocks are being driven by their own characteristics rather than macroeconomic events, which tend to push stocks in the same direction.

The decomposition of the change in risk from a stock-level perspective revealed that falling correlations contributed to the decline in the total risk of the STOXX Global 1800 index to a degree similar to that of the decline in stock volatilities over the past week, month, and three-, six-, and 12-months, as measured by Axioma’s Worldwide fundamental short-horizon level. We observed a similar pattern in most geographies except, once again, in China. Here the correlations’ contribution to risk offset the decline in total risk led by falling stock volatility over the past six and 12 months.

See graphs from the Global Developed Markets Equity Risk Monitor as of 10 June 2021:

Meme stocks drive up Russell 2000 trading volume

While average daily trading volume spiked for US small caps, it has declined for US large caps so far in June. Communication Services (home to AMC) and Consumer Discretionary (GameStop’s sector) saw the highest levels of trading activity among the Russell 2000 sectors, with both sectors exceeding their respective one-year trading averages. Strikingly, Communication Services’ current trading level neared $12 billion, more than seven-fold its 12-month average. AMC’s weight in Communication Services was more than 20%, while GameStop’s weight in Consumer Discretionary was 3%, as of last Thursday. Most other Russell 2000 sectors’ current trading volumes were close to their respective averages, except Health Care, which saw reduced trading recently.

See graphs from the US Small Cap Equity Risk Monitor as of 10 June 2021:

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