Equity Risk Monitors — November 9, 2020

Equity Risk Monitor Highlights | Week Ended November 5, 2020

This week Qontigo is excited to introduce our Developed Markets ex-US Equity Risk Monitor. This new Risk Monitor expands our coverage by applying Qontigo’s sophisticated analytics to a total of 12 markets worldwide.

US stocks rally as U.S. election results crystallize; Risk rises for all developed countries, not just the US; Momentum continues to outperform in Developed Markets ex-US

US stocks rally as U.S. election results crystallize

After the second consecutive month of losses at the end of October, the US market started climbing ahead of Election Day and after, as former Vice President Biden made gains in swing states and Senate election results took shape. The STOXX USA 900 gained about 6% over the past five days, greatly exceeding one standard deviation of the expectations at the beginning of the week, as measured by Axioma’s US Short-Horizon Fundamental Model. The cumulative year-to-date return of the STOXX USA 900 index surpassed 10% by Thursday. Heightened volatility accompanied the increase in US stocks, as the likelihood of a split Congress diminished the prospect of a corporate tax hike, but renewed concerns about a future stimulus package. As a result of the renewed volatility, the short-horizon risk forecast rose 220 basis points last week, reaching 24% on Thursday.

See graph from the United States Equity Risk Monitor as of 5 November 2020:

Risk rises for all developed countries, not just the US

Meanwhile, outside the US, the risk for Developed Markets ex-US ticked up last week, as measured by all four variants of Axioma’s Developed Markets ex-US model: fundamental and statistical, at medium- and short-horizons. However, the STOXX-Global-1800-ex-USA’s risk of 20% was 4 percentage points lower that of the STOXX USA 900 index, as measured by the Developed Markets ex-US and US short-horizon fundamental models, respectively.

The STOXX-Global-1800-ex-USA rose 7% over the past five days, even more than the US market. However, steeper losses earlier in the year kept Developed Markets ex-US from recording positive year-to-date or 12-month returns.

See graph from the Developed Markets ex-US Equity Risk Monitor as of 5 November 2020:

Momentum continues to outperform in Developed Markets ex-US

After falling steeply in May and early June, Momentum in the Developed Markets ex-US not only covered its earlier losses, but continued on an upward trajectory in the following months. The Medium-Term Momentum style factor recorded the highest one-year return (nearly 8%) among all style factors in the Axioma’s Developed Markets ex-US Medium-Horizon Fundamental Model, as of last Thursday. In contrast, Dividend Yield and Value were among the worst performers over the same period. Momentum’s correlation with each of the two style factors was highly negative (about -0.50). The high negative correlations suggest that high Momentum stocks do not necessarily offer good value or high dividend yields.

See graphs from the Developed Markets ex-US Equity Risk Monitor as of 5 November 2020: