Equity Risk Monitors — March 8, 2021

Equity Risk Monitor Highlights | Week Ended March 4, 2021

Factor volatility drives up US market risk; US small-cap stocks hold on to their advantage; Asset return dispersion widens in Asia Pacific ex-Japan

This week Qontigo is excited to announce the addition of several charts to each of the 12 Equity Risk Monitors. These charts provide a broader context for the sophisticated risk analytics in the Monitors.

Factor volatility drives up US market risk

The US market continued to fall, as the rise in factor volatility led to an increase in US equity risk last week. The decline in US stocks was amplified by the Federal Reserve Chairman’s remarks indicating that  the US economy is not even close to achieving full employment. The decomposition of the change in risk from a factor model perspective revealed that higher factor volatility was solely responsible for the increase in the STOXX USA 900 index’s risk, with slightly lower factor correlations offsetting some of the total risk increase last week.

Factor volatility also rose over the past month, but its impact on total risk was mostly offset by decreases in factor correlations and smaller stock exposures, resulting in only a small monthly increase in total risk for the US benchmark, as measured by Axioma’s US short-horizon fundamental model.

See graph from the United States Equity Risk Monitor as of 4 March 2021:

US small-cap stocks hold on to their advantage

While both large- and small-capitalization stocks tumbled in the US last week, small-caps have fared better overall in 2021 than their larger counterparts. The Russell 2000’s cumulative year-to-date return was close to 9%, while the STOXX USA 900’s approached zero last Thursday.

The Size factor in both US All Cap and US Small Cap models told a similar story. Both models saw outsized negative returns (more than two standard deviations below the expectation at the beginning of the period) for the past week and three months, indicating that small-capitalization shares have been outperforming their large-cap counterparts over these two periods.

Trading volume for stocks in the Russell 2000 skyrocketed since November, when news of vaccine improved market sentiment and lockdowns started to ease, raising hopes that smaller businesses previously crushed by the pandemic will now start to shine. Although it came down somewhat in the past week, the average trading volume in the US small-cap index is still above levels we have seen over the past year.

See graphs from the US Small Cap Equity Risk Monitor as of 4 March 2021:

Asset return dispersion widens in Asia Pacific ex-Japan

Dispersion—the cross-sectional standard deviation of weekly returns—has increased steadily in the STOXX Asia Pacific 600 ex-Japan index over the past five weeks. The wider the dispersion, the more potential opportunity for active managers to add value in this region. At the same time, winning stocks in the STOXX Asia Pacific 600 ex-Japan dominated losers in the index in the first half of February. While the number of winners and losers was about the same in the second part of the month, losers took over again last week. Most other regions saw declines in dispersion last week, after it had increased steadily in February.

See graphs from the Asia Pacific ex-Japan Equity Risk Monitor as of 4 March 2021:

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