Periodic Tables of Risk - Q3 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 Q4 2019 to Q3 2022 (trailing 3 years)

Commentary

• During Q3 2022, the U.S. dollar continued its strong performance against both riskier assets as well as other currencies thanks to the record pace of interest rate increases by the Federal Reserve. Higher U.S. interest rates (and a faster pace of tightening) versus the rest of the world and recession fears (flight to safety) were the primary drivers of U.S. dollar outperformance.
• Commodities went from a top performer over the past 2 years to the worst performing macro factor this past quarter. This eliminates, at least temporarily, another source of diversification as stocks, bonds, and commodities were all down in Q3 2022.
• Treasury bonds (Rates) continued to be positively correlated to stocks in Q3 2022, mirroring the poor performance of the stock market. Year to date 2022 has been one of the worst years on record for the previously trustworthy 60-40 (stocks, bonds) portfolio.
• Looking forward, if inflation were to peak allowing the Fed to decrease the pace of monetary tightening, Treasury bonds could rally, along with stocks. In this case, Treasury bonds would benefit from both an increased real yield (from declining inflation expectations) and a reduction in interest rate increase expectations. At the same time the inverted yield curve (Treasury bonds that mature in 1 year or less current yield more than bonds with that mature in 10 years or more), will continue to put pressure on the Rates factor due to its longer duration. The combination of a higher yield and significantly more flexibility, including the ability to benefit from higher yields, makes shorter duration bonds and cash appear attractive relatively to their longer duration counterparts.

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 Q4 2019 to Q3 2022 (trailing 3 years)

Commentary

• For the equity styles, there was very little difference between the top and bottom performers (< 3%). While overall stock market performance in Q3 2022 was not as poor as it was in Q2 2022, there wasn’t anywhere to hide.
• A continuing trend over the past three quarters of this downturn has been the disappointing performance of Quality stocks relative to the Market and Small stocks. Quality outperformed the broader market significantly over the past few years (prior to 2022) so the recent underperformance may be more mean reversion than structural.
• Something else to keep an eye on is liquidity and access to credit. Smaller companies, lower quality companies, and companies falling in the value bucket are more reliant on credit to fund their operations. Thus far, spreads have yet to blow out (which would indicate a significant increase in default expectations) thanks to a resilient jobs market. But on a nominal basis the interest rate on high yield bonds has doubled versus a year ago (though in real terms it remains low). If the economy softens due to all the recent rate hikes, access to credit could decline dramatically, pushing companies with weaker balance sheets into distress.

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.

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