Periodic Tables of Risk - Q2 2022
Published quarterly, the Periodic Tables of Risk highlight how different factors in the capital markets are affecting institutional investors’ portfolios. The percentages represent the trailing quarterly returns for these key factors.
Review the tables and accompanying commentary to understand what’s driving (or detracting) from returns for investors.
Asset Class Risk Factor Returns Q1 2019 to Q2 2022
Commentary
- Stock (Market) and bond (Rates) returns have grown increasingly correlated especially to the downside in recent quarters. Since 2010, there have been only five quarters when stocks and bond returns have both been negative. Three of those quarters have occurred within the trailing 4 quarters alone, with bonds actually underperforming stocks in Q1 2022. This means that the portion of an investor’s portfolio that was meant to hedge their riskier assets (like it did in Q1 2020 during the market turmoil caused by the pandemic) failed to do its job and that supposedly diversified portfolios were less diversified and more risky than they seemed.
- Historically, the US dollar and commodity prices have been inversely correlated, reflecting the tendency of investors to rush out of volatile assets like commodities and into liquid and high-quality assets like the dollar during uncertain and difficult market conditions. Another contributing factor is that many debts are denominated in US dollars, and when there is a rush to repay, the demand for dollars rises. Since Q3 2021 however, the US dollar and commodities have been moving much more in lockstep. This is because the current bout of market volatility is driven by inflation and high commodity prices. The policy response by the US Federal Reserve has been to raise interest rates, reducing the demand for risky assets like commodities and increasing the demand for US dollars.
- Overall, the factor performance of recent quarters has been driven by inflation and interest rate sensitivity. Factors that are positively correlated to unexpected increases in inflation like commodities have done well. Factors that are positively exposed to rising interest rates like the US dollars have also done well. Riskier factors that are hurt by rising rates and increased uncertainty around business conditions have naturally done worse.
Key
Market: MSCI All Country World Stock Index
Rates: 20+ Year Treasuries
Credit: US Corporate Credit Index
Commodities: GSCI Commodities Index
Dollar: US Dollar versus basket of foreign currencies
Equity Style Risk Factor Returns Q1 2019 to Q2 2022
Commentary
- For the longest time, post-pandemic, it had been a Growth and Momentum story. Now the tide has clearly turned and stocks that had been valued in retrospect unrealistically are being punished by the market.
- Surprisingly, Quality stocks have not been immune, reflecting the large overlap between technology and quality.
- The spread between the highest performing equity style and the lowest performing has been significantly higher than average over the past 2 quarters. This implies that despite the tendency of correlations to increase during market shocks, there is still reason and room to diversify even within the risky portion of the portfolio.
Key
Market: MSCI All Country World Stock Index
Quality: MSCI Quality Index
Momentum: MSCI ACWI Momentum Index
Growth: MSCI ACWI Growth Index
Value: MSCI ACWI Value Index
Large: MSCI ACWI Large Cap Index
Small: MSCI ACWI Small Cap Index
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Tony Yiu
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Tony Yiu is the Director of Quantitative Research & Development for Nasdaq Solovis and currently leads the Risk Analytics team.