Equity Risk Monitors — September 28, 2020

Equity Risk Monitor Highlights | Week Ended September 24, 2020

September losses leave the US market relatively flat for the year; Short-term correlations spike in the US; US Momentum ticks up, as its volatility remains high

This week we are excited to introduce our upgraded Equity Risk Monitors. Our goal was to improve their look and feel and to make some of the charts easier to understand. We also have introduced a new interactive format along with our pdf files, allowing users to download just one chart or the full report for a country or region.

Hovering over the chart will display the chart description and a download link for the individual chart. Finally, most monitors are now based on our family of STOXX indices. For more details, please access them here, on our newly revamped Qontigo website.

September losses leave the US market relatively flat for the year

US stocks saw large swings, culminating in a monthly loss, following economic, political and social unrest in September. The US market had rebounded strongly after the plunge in March, reaching a peak in the beginning of September, but has been in retreat ever since. The STOXX USA 900 index was able to cover the losses incurred earlier in the year, and even report an 11% cumulative year-to-date gain by September 2. However, the decline in US stocks over the past four weeks erased most of the prior gains, with the US index posting a cumulative year-to-date return of 1% last Thursday.

The US weekly loss exceeded one standard deviation of the expectations five days ago. However, the monthly return remained within one standard deviation of the expectation at the beginning of the horizon, as measured by Axioma’s US short-horizon fundamental model. The forecasted risk of the US market continued to decline last week, but at 21% was still more than double its level at the beginning of 2020.

See graph from the US Equity Risk Monitor as of 24 September 2020:

Short-term correlations spike in the US

After dipping to a six-month low at August end, asset correlations in the US shot up in September. One consequence of the recent market drop is that short-term correlations have spiked from their lows. The median pairwise realized 20-day correlation in the STOXX USA 900 index quadrupled in one month, nearing 0.40 on Thursday. While the 60-day median pairwise asset correlation continued to fall over the same period, it will likely follow in the footsteps of its shorter-term counterpart in a few weeks. Higher asset correlations typically reflect concerns that economic and market events will drive stock prices rather than companies’ individual characteristics, a probable reflection of the uneasiness created by the current geopolitical and economic turmoil.

See graph from the US Equity Risk Monitor as of 24 September 2020:

US Momentum ticks up, as its volatility remains high

As major US indices wavered, Momentum’s return improved last week. Medium-Term Momentum has been among the worst performing style factors in Axioma’s medium-horizon US fundamental model over the past six months. While Momentum produced a 170 basis-point return over the past five days, its six-month return was negative 120 basis points.

Momentum was also one of the most volatile factors in the US model, surpassed only by Size and Market Sensitivity. Momentum was one of only two factors that were positioned at the high ends of their one-year volatility ranges, as of last Thursday (as denoted by the yellow dot). The other factor was Growth, which, in contrast, was one of the top performers over the same period.

See graphs from the US Equity Risk Monitor as of 24 September 2020: