Qontigo Insight Quarterly

Most major markets were up in July, but down for the full third quarter – still, risk fell from quarter end to quarter end, with a few exceptions. It started to tick up at quarter end for a few, and our trading horizon model suggests that it will continue to rise.

The US market ratcheted up slowly but significantly during Q2; the steady increase sent volatility down almost 30%, to a below-average level. Market gains were on low volume and returns were concentrated, so it is unclear whether investors have conviction or even participated in realizing gains.

Although it seemed as if the potential banking crisis sent volatility soaring, that was not the case, as predicted volatility fell in most country and regional benchmarks. Industry risk increased, but other determinants of risk fell.

Markets recovered in Q4, and volatility fell for many, but predicted volatility ended the year in the top 15% of observations from the past 40 years in the US.

Market returns were negative in Q3, yet volatility fell from the end of Q2. Risk fell when markets rallied, but remained steady as they turned down. We found a number of drivers of the lower risk, which is unexpected. Some style indices’ active risk fell as well. Volatility turned back up in late September,

Most markets fell and risk increased in Q2 and YTD. US (Large and Small Cap) had the most negative returns, but Australia and Canada experienced the largest increases in predicted volatility (although are still at the low end of the risk spectrum).

Most markets fell in Q1, although commodity-dependent indices such as Canada did eke out small gains. Risk was up across the board and is higher than it was a year ago in most indices. US SH risk is in the 87th percentile relative to history.

Last quarter we discussed how markets seem to have decoupled. That has continued in Q4 as risk rose in the US (now among the riskiest markets but just around its long-term median) but was flat or fell in others.

In Q3, risk rose slightly in the US, somewhat more in Emerging Markets, Japan and Australia, and substantially in China and Asia ex-Japan.

Risk fell again across most indices in Q2 – US short horizon risk finally retraced its path back to where it stood before the 2020 crisis. Almost all components of risk contributed to the decline.

In Q1, most markets continued to build on the gains achieved in 2020, while risk changes were mixed across regions.

In a surprising turn of events, most equity markets finished 2020 with sizable gains—and the fourth quarter unquestionably did its part. Benchmark risk continued to slide in Q4—except for a blip in November—but still ended the year higher than where it started. Factor returns went wild in Q4 and many regions saw outsized returns for the year.