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Equity Risk Monitors — February 6, 2024

Equity Risk Monitor Highlights | Week of February 2, 2024

  • Risk Falling Off a Cliff (not in CHINA!) 
  • Small is Good Again (except in the USA & Japan) 
  • Breadth Still Narrow – beware 

Risk Falling Off a Cliff (not in CHINA!) 

The following Chart is not included in the Equity Risk Monitors but is available upon request:

Global markets ended the week with decidedly mixed performance, evident from the above chart.  The return of the STOXX China A 900 index stands out, as the economic turmoil in that country continues.  China’s risk forecast also bucks the trend with forecasts in other major equity markets falling “off a cliff” throughout January. Many markets saw risk approach, or even fall below, 12-month lows.

See Chart 7, Various Equity Risk Monitors, 2 Feb 2024: 

The pattern is not the same in all markets however, in the US and Japan in particular, the MH models held relatively steady throughout January while the SH model forecasts plummeted.  Upon further investigation, at the factor level in the US models, the only significant difference between medium- and short-horizon fundamental predicted risk appears to be the volatility forecast for the Market Intercept factor, so we looked at the asset level contributions to risk from both the SH and MH models side by side to see where the “extra” Medium-Horizon risk is coming from.  Here are the top 20 issuers by market cap in the STOXX World US Index as of 2 Feb 2024: 

The following table is not included in the Equity Risk Monitors but is available upon request: 

The top 20 names account for 100 bps, or 41% of the total difference, while the “Magnificent 7” (highlighted here) account for 74 bps, or 1/3 of the difference.  Others that show significantly higher risk contributions in the MH model are Exxon Mobil and JP Morgan. Risk appears to have fallen for this group of names quite a bit over the past month, reflected clearly in the differences displayed here.  

Small is Good Again (except in the USA & Japan) 

The Size Factor had a remarkably uncharacteristic year in Developed Markets in 2023, with some of the largest positive returns on record.  In the first few weeks of 2024, the US Size factor had a negative return, but as our analysis showed on the 12th of January, this did not jibe with the relative performance of small and large cap indices.  Looking back at the full 1st month of the year, we see that in all the developed markets except for the US and Japan, the Size factor’s upward trajectory seems to have reversed, if only temporarily.

See Chart 17 in Various Equity Risk Monitors, 2 Feb 2024:

Whether Size has been positive YTD or not, Medium-Term Momentum has been strong across Developed markets, particularly when the return to Size has been positive.

Breadth Still Narrow – beware

In markets that were up in the  last week, the gains were not widespread. In the UK, US, and Japan, far less than half of the index constituents outperformed the index as a whole, indicating very narrow breadth: 

See Chart 24, UK Equity Risk Monitor, 2 Feb 2024: 

See Chart 24, US Equity Risk Monitor, 2 Feb 2024: 

See Chart 24, Japan Equity Risk Monitor, 2 Feb 2024: 

For most of 2024 YTD and back into the year-end rally, for each of these markets, the proportion of out-performers has been quite low.  This doesn’t necessarily portend a reversal, but it is worth keeping an eye on.