Equity Risk Monitors — June 13, 2022

Equity Risk Monitor Highlights | Week Ended June 9, 2022

  • Drop in US Consumer Discretionary points to bearish sentiment
  • Factors drive a brief pause in the steady upward march of US volatility
  • Japan’s YTD return turns positive

Drop in US Consumer Discretionary points to bearish sentiment

US consumer discretionary spending has dropped, as sentiment in the US was battered by the prospect of aggressive monetary policies implemented to combat persistently high inflation and worries of an economic slowdown. Consumer Discretionary recorded the largest year-to-date loss ( -28.4%) among the 11 sectors in the STOXX® USA 900 Index as of last Thursday.

Consumer Discretionary also showed the highest stand-alone volatility (of 37%), exceeding even that of Energy—which had been by far the riskiest sector in the US from for several years ended April 2022. While the weight of Consumer Discretionary was lower last week than what it had been a year ago, the sector’s contribution to benchmark risk far exceeded what its weight would suggest. Consumer Discretionary contributes about 15% to the STOXX® USA 900 Index risk.

See graph from the United States Equity Risk Monitor of 9 June 2022:

Factors drive a brief pause in the steady upward march of US volatility

The US equity market saw a brief pause last week in the steadily upward march of volatility. The decomposition of the change in risk from a factor model perspective revealed that, although factor volatility was mainly responsible for the small decrease in the STOXX® USA 900 Index’s risk over the past five business days, it had contributed to a steady increase in the index risk over the past one, three, six, and 12 months.

When analyzing the decomposition of risk from the stock-level vantage point, lower stock volatility was responsible for the small decline in benchmark risk last week, while higher stock correlations offset some of the decline, as measured by Axioma’s US4 fundamental short-horizon model.

See graph from the United States Equity Risk Monitor as of 9 June 2022:

Japan’s YTD return turns positive

Japanese stocks rose last week, pushing the year-to-date return of the STOXX® Japan 600 Index into positive territory. To put things in perspective, only Canada and the UK managed this achievement among the geographies tracked by Qontigo’s Equity Risk Monitors. Last week’s roughly 2% return of the Japanese index  was not “oversized”, as it remained within one standard deviation of the expectations at the beginning of the week, as measured by Axioma’s Japan fundamental short-horizon model, but it was nonetheless notable.

Japan started the year as the riskiest region, but it witnessed the smallest increase in risk in 2022. As of last week, Japan was the fourth least risky geography after the UK, Australia and Canada.

See graph from the Japan Equity Risk Monitor as of 9 June 2022:

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