Periodic Tables of Risk - Q3 2023

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 2020 to Q3 2023 (trailing 3 years)

Commentary

• Q3 2023 was dominated by large interest rate increases that drove bonds (Rates factor) down sharply and equities (Market factor) down more modestly. This interrupted the stock market’s three quarter streak of firmly positive returns.
• Commodities on the other hand went from worst performing macro factor the prior two quarters to the best performing one due to supply tensions and likely some mean reversal. The Commodities factor’s outperformance in Q3 is likely to be idiosyncratic and supply driven rather than demand driven as most other economically sensitive assets (stocks and corporate credit) all suffered during the quarter.
• The big negative move by the Rates factor (Treasuries) is a interesting one. The U.S. economy has been confusingly strong despite significant interest rate increases. The market seems to have shifted from expecting a soft landing and a more dovish Fed to resigning itself to higher rates for longer. This has caused the yield curve to steepen (going from very negative to almost flat) as yields on longer duration bonds catch up to their shorter duration peers. This will likely cause further volatility as bonds are suddenly a competitive alternative to stocks again, especially on a risk-adjusted basis. Moreover, the future direction of interest rates will be heavily dependent on whether there is a soft landing or a recession. In a soft landing, rates will likely stay high to prevent inflation from causing risk assets to suffer. If there is a recession, rates will likely come down possibly kicking off another round of froth.

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 Q3 2020 to Q2 2023 (trailing 3 years)

Commentary

• From an equity style perspective, there wasn’t a lot of variance in performance in Q3 2023 as most styles adhered pretty closely (more so than prior quarters) to the overall market’s performance.
• Value continues to be an area of the stock market that provides some shelter. Looking back a few quarters, you can see that value tended to suffer the least in quarters where markets were selling off.

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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