January 2022 Venn Factor Performance Report

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 - January 2022.

• Global stock markets nosedived to start the year, with Venn’s Equity factor returning -4.59%, and the Local Equity factor (in USD) losing an additional -0.63%. Markets rallied over the last few trading days of January, which helped stem even more significant losses in the days preceding them. Overall, the macro environment led to risk-off sentiment for much of January:
  • Building on expectations set in December, the Fed sent a clear signal following its January 26th FOMC meeting, indicating that it would start tightening financial conditions with steady rate-increases set to begin mid-March to offset the impact of high inflation coupled with a strong labor market.¹ 
  • Meanwhile, geopolitical tensions rose given the potential Russian invasion of Ukraine, adding uncertainty to a shifting economic environment as Biden threatened steep sanctions in response.²
  • The Omicron variant continued to have an impact on economies and markets as elevated cases following the holiday season led to numerous disruptions, exacerbated labor shortage issues, and revisions to growth expectations in the first quarter.³
• Unlike in December, the Interest Rates factor had quite an eventful month in January, returning -1.36%, as markets reacted to a more hawkish tone from both the Fed and BOE:
  • The bond markets priced in an additional two Fed rate hikes, bringing the expected total up to 5 over the course of 2022.⁴
  • The BOE is also expected to continue tightening rates and potentially begin its balance sheet runoff process as both central banks turn their focus to fighting inflation.⁵
• Commodities continued to rally in January, up 4.97%. This marked one of the largest monthly returns for the Commodities factor in Venn’s history, given the backdrop of heightened inflationary risks:
  • Brent and US WTI Oil were two of the top performing major financial assets on the month, as stockpiles fell in the US and production promised by OPEC and Russia-led partners continued to fall short.⁶
• In terms of the macro style factors:
  • Equity Short Volatility ended the month in positive territory, delivering a small gain of 0.75%. Within the month, the VIX nearly doubled from 16.60 to 31.96⁷, coinciding with a steep selloff in equities, before retreating. Much of the decrease in the raw factor input, the CBOE S&P 500 PutWrite Index, was offset by its residualization to the Equity factor.⁸
  • The Fixed Income Carry factor also delivered more gains this month, continuing a trend seen in December. While performance was modest, the factor experienced a two-standard deviation move over the last week of January, gaining 3.5% in five trading days.
• The equity style factors saw historic movements:
  • Value was by far the best performing factor in the lens in January, registering a 99th percentile move, up 12.68%. Notably, each factor input contributed to the rally. As seen in December, the market continued to favor stocks with less sensitivity to interest rates while punishing growth stocks that had been supported by ultra-low interest rates for much of the pandemic.⁹ The majority of the Value factor’s gains were due to the short side of the pair with expensive stocks underperforming in a period of heightened volatility. 
  • Momentum was the worst-performing factor in the lens in January, down -4.88%, maintaining its long-term negative correlation to the Value factor. The underperformance can largely be attributed to concentrations in the Information Technology and Consumer Discretionary sectors, which suffered as high-growth companies repriced in the wake of higher yields.¹⁰
  • Crowding followed up last month's record performance with nearly another, registering a 99th-percentile move since the factor’s inception, up 2.42%. While the Crowding factor, like most style factors, is susceptible to deleveraging events and market unwinds (as seen here), the broad investment community has continued to be rewarded despite the most recent selloff. 
  • Within the Quality factor, losses from the Leverage and Profitability components overpowered gains in the Investment Quality, Earnings Quality, and Earnings Variability components. 
  • The Small Cap factor extended its losing streak for a fourth month in a row, now down -7.33% from the beginning of October through the end of January.

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

REFERENCEs

¹ https://www.reuters.com/business/finance/inflation-fighting-fed-likely-flag-march-interest-rate-hike-2022-01-26/

² https://www.reuters.com/world/europe/us-seeks-protect-europes-energy-supplies-if-russia-invades-ukraine-2022-01-25/

³ https://www.nytimes.com/2022/01/24/business/economy/omicron-economy.html

⁴ https://www.reuters.com/article/usa-bonds/corrected-treasuries-traders-price-in-nearly-full-chance-of-five-fed-hikes-in-2022-idUSL1N2U70X0

⁵ https://www.reuters.com/article/britain-sterling/pound-firms-on-chances-of-more-aggressive-rate-rises-idUKL8N2UB236

⁶ https://www.wsj.com/articles/opec-russian-oil-output-increases-fall-short-of-promises-stoking-prices-11643108001

⁷ https://www.cboe.com/us/indices/dashboard/VIX/

⁸ https://www.cboe.com/us/indices/dashboard/put/

⁹ https://blogs.imf.org/2022/01/27/low-real-interest-rates-support-asset-prices-but-risks-are-rising/

¹⁰ https://www.nasdaq.com/articles/january-2022-review-and-outlook

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