Equity Risk Monitors — September 15, 2020

Equity Risk Monitor Highlights | Week Ended September 10, 2020

FAANGs lead market rout in the US; Global risk ticks up following tech plunge; Asset diversification at near-term peak

FAANGs lead market rout in the US

All three sectors containing FAANG stocks were the biggest losers among US sectors last week. While all US sectors fell, Communication Services (host of Facebook, Alphabet/Google and Netflix), Consumer Discretionary (host of Amazon), and Information Technology (host of Apple), saw the largest drops, sliding more than 6% over four business days. Info Tech suffered the most, recording a weekly loss of 9%.

Despite the recent selloff, Consumer Discretionary (28%), Information Technology (25%) and Communication Services (11%) recorded the largest year-to-date cumulative returns as of last Thursday. In fact, only three other sectors produced positive year-to-date returns so far this year: Health Care, Materials and Consumer Staples. Communication Services, Consumer Discretionary and Information Technology were also among the least risky sectors. However, due to their large weights in the Russell 1000 index, together they contributed about 50% to the benchmark risk.

See graph from the US Equity Risk Monitor as of 10 September 2020:

Global risk ticks up following tech plunge

The risk of the global equity market ticked up following an intense week of stock declines, particularly among big technology companies, as noted above. The Risk Watch chart shows that the STOXX Global 1800’s loss over the past five days (the very short black line arrow) remained within one standard deviation of the predicted risk at the beginning of the period (the black dot). Last week’s slide in stocks also brought the one-month return down into negative territory, but the return remained within one standard deviation of the predicted risk four weeks ago. Returns remained positive over the three- and six-month periods. The impact of last week’s drop was relatively small on risk. After dropping more than 13 percentage points over the past six months, global market risk rose 12 basis points over the past week, as measured by Axioma’s Worldwide short-horizon fundamental risk model.

See graph from the STOXX Global 1800 Equity Risk Monitor as of 10 September 2020:

Asset diversification at near-term peak

The diversification ratio spiked for the STOXX Global 1800 at August end and remained at that near-term peak level in September, indicating that portfolio managers were in the best position to diversify their portfolios since the market turned down. The asset diversification ratio is calculated as the weighted average of the total risk forecast for each stock in the index, divided by the total forecasted index risk, and measures the impact of correlations—which dipped to a six-month low in September—on total risk. However, the STOXX Global 1800’s ratio of 2.4 represents only half of its level in February, before the market tanked (not shown on the chart, which only covers the past six months). Asset diversification also improved in all other regions Axioma covers closely.

See graph from the STOXX Global 1800 Equity Risk Monitor as of 10 September 2020: