Equity Risk Monitors — September 8, 2020

Equity Risk Monitor Highlights | Week Ended September 3, 2020

US market among the top performers—but still one of the riskiest; US small-cap stocks lag large caps; Profitability and Low Volatility outperform in China

US market among the top performers—but still one of the riskiest

The US saw one of the strongest recoveries among both emerging and developed markets since the worldwide collapse of stocks earlier in the year. After hitting fresh records in the beginning of the week, the US market dropped sharply—led by the selloff in technology companies—and finished the week relatively flat. The US six-month return remains near the top, with only Denmark, Sweden, Germany and Turkey seeing higher gains (denominated in US dollars) over the same period.

Only a month ago, China, Taiwan, Korea and Denmark were the only countries with positive six-month returns. As of last week, all major developed and emerging countries were in the black. Risk has retreated substantially for most countries over the past six months, but the US remains one of the riskiest developed countries. Switzerland and Russia are now among the least risky countries, as measured by Axioma’s US Worldwide short-horizon fundamental model.

See graph from the Equity Risk Monitors as of 3 September 2020:

US small-cap stocks lag large caps

While most stocks participated in the US rebound, small-cap stocks have been unable to cover their massive February-March losses. Smaller companies in the US have been hit much harder by pandemic-related lockdowns, with the Russell 2000 recording a year-to-date cumulative loss of 40% in mid-March, while the Russell 1000 recorded a 30% loss around the same time. Both large- and small-cap stocks have since rebounded strongly, but, as of last Thursday, the Russell 2000’s year-to-date cumulative return was still negative (at -7%) while Russell 1000’s return was positive (+9%).

After climbing above 50% in April, the risk of the Russell 2000 hovered around that level until June, when it began to decline, as measured by Axioma’s US Small Cap short-horizon fundamental model. In contrast, Russell 1000 risk started to fall right after hitting its year-to-date peak of 42% in April, as measured by Axioma’s US All Cap short-horizon fundamental model. The gap between short-horizon risk forecasts for the Russell 2000 and Russell 1000 has widened since March, when the two were at parity. As of last Thursday, the Russell 2000 was more than 40% riskier than its large cap index counterpart. This relative level of risk for the Russell 2000 has not been seen since 2018.

See graph from the US Small Cap Equity Risk Monitor as of 3 September 2020:

Profitability and Low Volatility outperform in China

Investors have been dialing back their interest in risky assets in China over the past six months, with the Volatility factor experiencing a nose-dive over the past couple of months, while Profitability took the spotlight in the opposite direction. The Volatility factor has been breaking away from the pack for a while in Axioma’s China fundamental medium-horizon model, recording a cumulative six-month return of -7%. That is, low-volatility strategies fared well in China over this period. Profitability recorded the largest positive six-month return in the China model at 6%. In fact, Profitability recorded positive returns at the one-week and one-, three-, and six-month horizons.

See graph from the China Equity Risk Monitor as of 3 September 2020: