April 2022 Venn Factor Performance Report

April Venn Factor Performance Report

As seen in Q1, a litany of macroeconomic and geopolitical issues has continued to sow volatility in asset prices. The war in Ukraine, COVID-driven lockdowns in China, and the tightening of financial conditions by global central banks all contributed to this narrative in April.¹ It has been particularly difficult for investors who allocate to stocks and bonds as both asset classes were hit by the combination of rising inflation and less accommodative policy, primarily through increasing interest rates.¹ 

Source: Venn by Two Sigma. The median and percentile columns measure the performance of each factor in the Two Sigma Factor Lens relative to the entire history of the factor in USD, using monthly data for the period March 1995 - April 2022.

• The Equity and Local Equity factors were both down markedly in April as risk-off sentiment and less accommodative central bank monetary policy pushed equity markets and valuations lower, particularly in the US.¹
  • Key issues that contributed to a tough month of performance for US equities included deteriorating investor sentiment, a surprise negative GDP reading, continued increases in inflation, supply-chain bottlenecks, and intensifying geopolitical tensions as a result of the war in Ukraine.² The S&P 500 had its worst start to a year since 1939,² now down -12.92% YTD through April 29, 2022.³ Meanwhile, the Nasdaq also had its worst start to a year dating back to the index’s inception in 1971, falling -21.20% during the same period.² 
• The Interest Rates factor declined for a fifth month in a row, as the shift to a higher interest rate environment led bond prices lower.¹
  • Several members of the Fed’s Board of Governors spoke openly about their desire to bring interest rates back to a neutral state as quickly as possible,¹ as the annual US inflation rate hit yet another record high.⁵ Validating expectations, the Fed increased interest rates by half a percentage point following the May 4th FOMC meeting, the largest such hike in 22 years.⁶
  • Global government bond yields followed the rise in US markets.⁴  The Reserve Bank of New Zealand raised rates for a fourth time in a row, also by a hefty half a percentage point, the biggest such increase in 20 years.⁷ Additionally, a number of other global central banks were expected to announce further tightening of financial conditions to combat inflation.⁸ 
• The Commodities factor moved higher for a fifth month in a row, with the war in Ukraine and supply chain bottlenecks driving much of the gains across sectors.⁹
  • On the back of last month's historic gains, April saw continued increases across natural gas, wheat, and crude. While ongoing geopolitical factors have impacted commodities across the board, gains were most apparent in those exported by Russia and Ukraine.⁹ 
• The Emerging Markets factor turned around in April, stemming heavy losses incurred in February and March. While Emerging Market equities were negative on the month in absolute terms, they outperformed Developed Market equities. The factor’s additional  residualization to the Interest Rates and Credit factors and a Global Currency Basket all helped drive the Emerging Markets factor upward.
• It was another tough month for the Foreign Currency factor as the USD continued its ascent, maintaining its position as a safe haven for investors.
  • The USD posted its best monthly return since 2015 as concerns about the global economy and more aggressive central bank tightening pushed up demand. Some market participants saw broad-based strength from risk aversion.¹⁰
  • The impact of higher interest rates and yields on US government debt also lured investors into US Treasurys, consequently pushing down foreign currencies at the same time that growth estimates for the global economy fell.¹¹
  • Accommodative central bank policy in Japan also pushed the Yen lower, which amplified movement in the USD/JPY currency pair.¹⁰
• Within Macro Styles:
  • Foreign Exchange Carry followed up last month's near record performance with another solid gain, extending the factor’s upward move for a third month in a row. The same dynamics in March carried over into April, with long positioning in an ever higher yielding USD being funded by lower yielding currencies like the Japanese Yen driving much of the gains.¹⁴ The factor is now up 11.82% YTD through April 29, 2022.
  • Trend Following was the best performing factor in April, with broad-based gains across all four asset classes, and most notably outperformance within Currencies. The factor has been up for 5 straight months now, which aligns with the overall category performance, as CTAs have just notched their best start to a year in two decades.¹² Unsurprisingly, Trend Following has historically performed well in past inflationary periods as there are often pronounced movements with equities and bonds moving downward and commodities moving upward.¹³
• Within Equity Styles: 
  • The Value factor rose for a sixth month in a row, once again largely driven by a sharp drop in the price of expensive stocks. As mentioned previously, the expectation of a more aggressive rate-hiking path sent high valuation stocks tumbling as their future cash flows are more sensitive to higher discount rates.
  • Low Risk turned in strong performance as investors rotated to safety as equity markets sold off.
  • Crowding rebounded in April following initial hedge fund de-risking that took place in March. The factor nearly doubled its YTD performance coming into the month, now up 3.75% YTD through April 29, 2022.

References to the Two Sigma Factor Lens and other Venn methodologies are qualified in their entirety by the applicable documentation on Venn.

REFERENCEs

¹https://am.jpmorgan.com/gb/en/asset-management/per/insights/market-insights/market-updates/monthly-market-review/

² https://www.marketwatch.com/story/a-rough-4-months-for-stocks-s-p-500-at-risk-of-booking-the-worst-start-to-a-year-since-1942-heres-what-pros-say-you-should-do-now-11651250525 

³https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview

⁴https://www.nytimes.com/2022/04/21/business/jerome-powell-rate-increases-fed-reserve.html 

⁵https://tradingeconomics.com/united-states/inflation-cpi

⁶https://www.nytimes.com/2022/05/04/business/economy/fed-rate-decision-inflation.html

⁷https://finance.yahoo.com/news/zealands-central-bank-raises-interest-020844137.html

⁸https://www.reuters.com/business/calling-time-qe-central-banks-prep-synchronized-asset-cull-2022-04-19/

⁹https://www.barrons.com/articles/food-prices-keep-climbing-the-pain-wont-end-soon-either-51651132801

¹⁰https://money.usnews.com/investing/news/articles/2022-04-28/dollar-towers-at-two-decade-high-on-growth-woes-fed-outlook#:~:text=April%2028%2C%202022%2C%20at%209%3A40%20p.m.&text=NEW%20YORK%20(Reuters)%20%2D%20The,bolstered%20demand%20for%20the%20greenback.

¹¹https://www.ft.com/content/7928db39-8a5b-4963-bea5-80714143c8fd

¹²https://www.bloomberg.com/news/articles/2022-03-07/momentum-quant-trade-is-having-best-year-in-almost-two-decades

¹³https://www.man.com/maninstitute/trend-following-in-inflationary-environments

¹⁴https://www.forex.com/en/market-analysis/latest-research/back-from-the-dead-the-revival-of-the-fx-carry-trade/

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