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 - July 2020.

Market Themes

  • The global rate of increase in new daily COVID-19 cases rose.1 U.S. hot spots shifted from southern and western states to the Midwest, and an uptick in cases in Europe and Asia called for renewed restrictions 2. Emerging market countries, such as India and Brazil, also continued to see an increase in new cases.3
  • U.S.-China tensions increased on multiple fronts, including U.S. sanctions on Chinese officials and entities in response to China’s national security law in Hong Kong 4 and technology (e.g., Huawei's 5G global influence was further curtailed in Britain 5 and France, and there were discussions over banning the TikTok app in the U.S.6).
  • Expectations of higher inflation 7 following broad monetary policy measures pushed gold prices to record highs.8

 

Factor Performance Summary

  • Generally, global Equity markets were up in July. 
    • The U.S. equity market in particular outperformed, with the Local Equity factor posting 1.50% returns for the month, supported by recovering economic data 9 and rising expectations for more fiscal stimulus at the end of the month. 
    • Equities in Emerging Markets also outperformed, with the MSCI Emerging Markets Index delivering 8.94%.10  Emerging currencies and debt were also positive for the month.11 A key contributor was rising Commodities prices (the Bloomberg Commodity Index returned 5.71% in July, while the residualized Commodities factor returned 0.73%12). After taking this into account, as well as emerging markets assets’ relationship with the other three core macro factors, the residual Emerging Markets factor was surprisingly down -0.59% for the month.
  • Falling global yields benefitted the Interest Rates factor, as investors appeared to seek safety in government bonds despite the relentless rally in stocks.13 Additionally, yields fell in the U.S. following dovish statements from the Federal Reserve, which emphasized its commitment to aggressive stimulus to fight the economic challenges from the COVID-19 pandemic.14 
  • The Foreign Currency factor in the USD version of the factor lens, which is long G10 ex USD currencies funded by a short USD position, was up 3.44% in July. The factor benefitted from a falling USD, which posted its worst monthly return in a decade.15 Many variables contributed to the USD’s noteworthy selloff, including a narrowing gap between interest rates and expected growth rates in the U.S. versus the rest of the world, a deteriorating fiscal position, worsening infection rates, and uncertainty around the upcoming election.16
    • The falling USD also hurt the Foreign Exchange Carry factor, as the factor was positioned long the USD over the course of the month.
  • As discussed in the Market Themes section above, inflation expectations rose in July, boosting the Local Inflation factor. Gold’s rally also supported the aforementioned rise in the Commodities factor. 
  • In terms of the equity style factors in the Two Sigma Factor Lens:
    • Momentum continued its outperformance (now up 23.13% YTD through July 31st), as secular growth stocks, such as those in the technology sector 17, continued their outperformance and posted strong earnings.18
    • Value, on the other hand, suffered in July, with its Book-to-Price component leading the factor’s underperformance.
    • Venn’s new Crowding factor, which is intended to capture short exposure to stocks that are widely shorted by the investment community, was up 0.33%. Read more about the latest addition to the Two Sigma Factor Lens here.

 

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REFERENCES

1 Source: Worldometer Daily Cases (worldwide).

2 Source: NBC News article “Britain brings back restrictions as Europe, Asia see COVID-19 cases spike” on July 31, 2020.

3 Source: Worldometer Daily New Cases in Brazil and Daily New Cases in India.

Source: The Wall Street Journal article “U.S. Sanctions on Hong Kong Security Law Put Banks in a Quandary” on July 15, 2020.

Source: The New York Times article “U.K. Bars Huawei for 5G as Tech Battle Between China and the West Escalates” on July 14, 2020.

Source: The Wall Street Journal article “Microsoft Is in Talks to Acquire TikTok, as U.S. Considers Banning the App” on July 31, 2020.

7 Source: FRED Economic Data 10-Year Breakeven Inflation Rate.

Source: The Wall Street Journal article “Gold Prices Hit Record as Dollar Drops” on July 27, 2020.

9 For example, U.S. retail sales data rose more-than-expected in June.

10 Source: Venn as of August 10, 2020.

11 Source: Venn as of August 10, 2020.

12 Source: Venn as of August 10, 2020.

13 Source: Reuters article “Public investors plan move to government bonds in safety play” on July 29, 2020.

14 Source: The Wall Street Journal article “Treasury Bond Yields Approach Record Low After Fed Statement” on July 29, 2020.

15 Source: Bloomberg article “U.S. Dollar Suffers Its Worst Month in a Decade” on July 31, 2020.

16 Source: Financial Times article “US dollar has worst month since 2010 in ‘relentless’ sell-off” on July 31, 2020.

17 Source: Venn as of August 10, 2020. The technology sector, as represented by the iShares Global Tech ETF and the Information Technology category in Venn, exhibited statistically significant positive exposure to the Momentum factor over the most recent 6 month period.

18 Source: The New York Times article “They Made How Much?” on July 31, 2020.

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

This article is not an endorsement by Two Sigma Investor Solutions, LP or any of its affiliates (collectively, “Two Sigma”) of the topics discussed. The views expressed above reflect those of the authors and are not necessarily the views of Two Sigma. This article (i) is only for informational and educational purposes, (ii) is not intended to provide, and should not be relied upon, for investment, accounting, legal or tax advice, and (iii) is not a recommendation as to any portfolio, allocation, strategy or investment. This article is not an offer to sell or the solicitation of an offer to buy any securities or other instruments. This article is current as of the date of issuance (or any earlier date as referenced herein) and is subject to change without notice. The analytics or other services available on Venn change frequently and the content of this article should be expected to become outdated and less accurate over time. Two Sigma has no obligation to update the article nor does Two Sigma make any express or implied warranties or representations as to its completeness or accuracy. This material uses some trademarks owned by entities other than Two Sigma purely for identification and comment as fair nominative use. That use does not imply any association with or endorsement of the other company by Two Sigma, or vice versa. See the end of the document for other important disclaimers and disclosures. Click here for other important disclaimers and disclosures.

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