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Equity Risk Monitors — June 27, 2023

Equity Risk Monitor Highlights | Week Ended June 23, 2023

  • From a few stocks leading the market higher to many stocks driving it down
  • Trading volume has increased, but highlights narrow market
  • US industry risk shows wide dispersion

From a few stocks leading the market higher to many stocks driving it down

In recent weeks we have written about the narrow market breadth we have observed in the US market. The market was rising, but it was mainly driven up by a handful of names, while the vast majority of stock returns were lower than the market’s. For the week ended June 23, the US market fell, driven only partly by a reversal for some of the previously high-flying names. Only 20% of the stocks in the STOXX® USA 900 were up last week, and less than 40% had a higher return than its 1.5% loss. As the Fed announced a pause but an expectation of rate hikes later this year negatively impacted many of the richly valued growth stocks, especially in the semiconductor industry, others with more of a consumer focus were spared.

The narrow breadth this year has made it difficult to outpace the rising US market; Sadly, in the recent downturn, it has not been any easier.

See graph from the United States Equity Risk Monitor of 23 June 2023:

Trading volume has increased, but highlights narrow market

Another theme from the past few months has been the low level of trading volume, which went hand-in-hand with the narrow breadth. The two observations together suggested a lack of conviction in what otherwise looked like a strong equity market.

The good news about trading volume is that volume in Global Developed Markets has picked up substantially since May, ending last week well above the levels observed throughout the last year. That could be viewed as an improvement in the underlying “mechanics” of the market, as investors are willing to trade more currently than they have been for a long time.

However, the increase in volume is related to the low breadth. The chart below compares the average volume in the sector over the past 12 months to the most recent reading. It is clear that Global trading volume has mainly increased in just two sectors — Consumer Discretionary and Information Technology. Global volume has also been driven mainly by the US market. Although up in June, it remains below the April peak in Europe and Asia ex-Japan. Recent Emerging Markets volume, however, is also much higher than it has been over the past year, driven mainly by Information Technology and Industrials.

See graphs from the Global Developed Markets Equity Risk Monitor of 23 June 2023:

US industry risk shows wide dispersion

Predicted risk from Axioma’s short-horizon fundamental model continued to fall slightly in the US last week, although it was up in Developed Markets ex-US as well as in Emerging Markets. The continued decline at the aggregate level in the US has masked rising risk in some individual industries, an increase active managers may want to be aware of.

Predicted volatility for more than half of the GICS industries in the US is within 10% of the 12-month low level, mirroring the trend of the overall market. Eight of the 68 industries ended last week at the 12-month low.

A few industries stand out as notable exceptions, however. 32% are 10% or less from their 12 month high level, and two are at the high. The Banks industry is notable for being the farthest away from its recent low, but a number of other industries, in Information Technology (e.g. IT Services and Communications Equipment), Utilities (e.g. Electric Utilities and Multi-Utilities) and Industrials (Machinery and Building Products) also have risk forecasts at the upper end of the range.

See graph from the United States Equity Risk Monitor of 23 June 2023: