Equity Risk Monitors — July 5, 2022

Equity Risk Monitor Highlights | Week Ended June 30, 2022

  • The US remains riskier, and risk has fallen less than outside its borders
  • Cheaper stocks are exhibiting better momentum
  • US Energy Risk Contribution is below its index weight

The US remains riskier, and risk has fallen less than outside its borders

The US market just ended one of its worst first-half periods in decades. Short-horizon fundamental predicted volatility for the STOXX USA 900 has correspondingly increased, up more than 2 ½ times from the low reached in September 2021 and more than 85% this year, driven higher by increased individual stock volatility as well as substantially higher stock correlations. While most major developed equity markets have fallen this year, the STOXX Europe 600 and STOXX Japan 600 have thus far fared much better than their US counterpart. Thus, the STOXX Global 1800 ex USA index has “only” seen risk double from its most recent low level in October. Last fall Developed ex-US risk was higher than that in the US, but by the end of the first half of this year US risk exceeds non-US developed markets risk by 5.5 percentage points.

See graphs from the US and Developed Markets ex-US Equity Risk Monitors as of June 30, 2022:

Cheaper stocks are exhibiting better momentum

The WW4 (Worldwide) risk model correlation between Earnings Yield and Momentum was just about 0 as of June 30, up 0.28 from the level of a year ago. While Value (book/price) and Momentum remain negatively correlated, they are more correlated than they were a year ago. These correlations suggest that Value and Earnings Yield have picked up Momentum, and/or that Momentum has become cheaper. They also imply a potential increase in active risk, as the diversification benefit of negative correlations has been reduced. Of course with substantial changes in volatility and its components over the past year, it certainly was not just correlations that drove changes in active risk. We also note that the changes in correlation are much more pronounced in the US than they are outside the US.

See graph from the Global Developed Markets Equity Risk Monitor as of June 30, 2022:

US Energy Risk Contribution is below its index weight

At the end of 2021 Energy’s weight in the STOXX USA 900 was just over 2.5%, which, as it had been for some time, was roughly equal to its contribution to index risk. Six months later, after far outperforming all other sectors, its weight has climbed to almost 4.4%. Its risk contribution, in contrast, has only climbed by one percentage point, and is now less than what would be implied by its weight. Still, with expected volatility of 44% Energy remains the riskiest of the 11 GICS sectors, with risk 13% higher than Consumer Discretionary, the next-highest-risk sector.

See graph from the US Equity Risk Monitor as of June 30, 2022:

The graph below is not currently in the equity risk monitors, but will be soon