Equity Risk Monitor Insights

Week of June 15

As the head of the Applied Research team, I am charged with providing insights into the current state of market risk and how it might be impacting investors’ portfolios. Once a week, we publish a summary of the highlights from the prior week, using Axioma’s risk models and analytic tools to transform data into information. 

This week we noted that US Momentum had a great run over the past six months, but dropped abruptly last week, dragged down by tech stocks. The six-month cumulative return of the Medium-Term Momentum factor was 1.65% as of last Thursday. It was only a couple of weeks ago that Momentum recorded unusually strong returns. That has changed, however, as the style factor saw a -0.93% return last week in the US, making the factor’s monthly return flat. Last week’s downturn in Momentum was also seen, albeit to a lesser extent, in the UK, Japan, Canada, China, Developed Europe, and Developed Markets. In contrast, the factor’s weekly returns were positive in Australia and flat in Asia Pacific ex-Japan and Emerging Markets.

At the same time, the US Information Technology sector has had a great run in 2017, reaching a cumulative year-to-date return of 22.4% on Thursday of the prior week. Over the past five business days, however, a reversal of fortune dragged the cumulative return down to 18%. At the same time, the risk of the sector ticked up 20 basis points even as overall benchmark risk continued to tick down. The Information Technology’s weight in the Russell 1000 rose above 20%, but so did its contribution to the index risk, which last week exceeded its levels of six months ago. When delving into the Information Technology industries, risks of Communication Equipment, Software, and Semiconductors & Semiconductor Equipment moved from the low end of their six-month volatility range to the middle over just the past three weeks. There were no major changes in the risks of Internet Software & Services, IT Services, Electronic Equipment, Instruments & Components, or Technology Hardware, Storage & Peripherals.

We also realized that asset correlations in the UK shot up following the surprise results of the UK elections earlier in the month. 20-day correlations for FTSE 350 almost tripled since the beginning of June when the 20-day median pairwise asset correlation dropped to around 0.06. Last week, the 20-day median reached 0.19—a six-month peak. 60-day correlations also jumped last week, nearing 0.16, but not exceeding the high levels seen in December of last year. Longer-term asset correlations have been ascending since mid-March. Higher asset correlations typically reflect concerns that economic and market events will drive stock prices rather than companies' individual characteristics, so based on these correlations it appears that investors’ views that Brexit would have varying impact on individual stocks has been superseded by concerns that a divided government could have a much broader effect on companies’ fortunes.

If you’d like to get timely insights emailed directly to you, please sign up for our weekly newsletter.

Melissa R. Brown, CFA

As Managing Director of Applied Research, Melissa Brown generates unique insights into risk trends by consolidating and analyzing the vast amount of data on market and portfolio risk maintained by Axioma. Brown’s perspectives help both clients and prospects to better understand and adapt to the constantly changing risk environment.