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 - February 2020.

Market Summary

• The coronavirus outbreak contributed to meaningful market turbulence in February. The large question going into the month was whether China would be able to contain the spread of the virus or if it would begin to spread globally. In late February, clusters of the coronavirus emerged in South Korea, Iran, and Italy, and soon to many other countries, including the U.S., leading to fears of a global pandemic.¹
• In the U.S., the Democratic primaries showed Bernie Sanders with a strong start out of the gate in February (Joe Biden has since emerged as the leading candidate following Super Tuesday on March 3rd).²
• OPEC and other oil producers discussed whether to cut supplies in response to lower oil demand resulting from the coronavirus outbreak, but they did not reach a formal decision.³

Impact on the Factors in the Two Sigma Factor Lens

• The fear of a pandemic resulting from the global spread of the coronavirus impacted markets, specifically towards the end of the month:
  • Equity markets around the world suffered.
  • Emerging Markets outperformed developed as the number of coronavirus cases in China peaked early in the month. The CSI 300 Index, a “blue chip” stock market index in China, bottomed on February 3rd and rallied for the rest of the month, ending February -2.4% (in USD terms).⁴
  • The VIX spiked, especially as equity markets plunged during the final week of February, resulting in a poor return for the Equity Short Volatility factor even after residualizing to Equity.⁵
  • A decline in inflation breakevens put pressure on the Local Inflation factor.⁶
  • Three of the five equity style factors posted greater than 1% losses:
    • Low Risk suffered 9% in just the last week of the month. As seen in other severe market sell offs, low beta stocks can underperform what their betas might suggest due to beta compression.⁷ The 5 day performance ending on February 28th was the factor’s 7th-worst rolling 5 day period over its full history (dating back to March 1, 1995) and represented a greater than 5 standard deviation event.⁸
    • All Value components were down in February (Dividend Yield led the pack), as cyclical names continued to sell off.⁹
    • Quality also ended the month negative, with mixed performance from its five underlying components. Losses from Earnings Variability, Investment Quality, and Earnings Quality more than offset the gains from Leverage and Profitability.¹⁰

REFERENCES

¹Source: NPR article “Where Coronavirus Is Now Causing Concern: Iran, Italy, South Korea” on February 24, 2020.

²Source: The Wall Street Journal article “Bernie Sanders Wins New Hampshire Primary” on February 12, 2020.

³Source: The Wall Street Journal article “OPEC, Allies Weigh Deeper Oil Production Cuts to Counter Coronavirus’s Impact” on February 4, 2020.

⁴Source: Venn by Two Sigma.

⁵Source: Trading Economics.

⁶Source: FRED 10-Year Breakeven Inflation Rate.

⁷Sources: Venn, Acadian’s viewpoint “Quick Take: Beta Compression During Crises” in March 2020, and Frazzini’s and Pedersen’s paper “Betting Against Beta” on May 10, 2013.

⁸Source: Venn by Two Sigma.

⁹Source: Venn by Two Sigma.

¹⁰Source: Venn by Two Sigma.

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