June Fed Hike Weekly Factor Performance: Four Factors That Were Safe Havens While Many Markets Struggled

June Fed Hike Weekly Factor Performance: Four Factors That Were Safe Havens While Many Markets Struggled

Following the 8.6% inflation surprise on June 10, the Fed hiked rates by 75 bps, the largest hike since 1994.¹ Two Sigma’s Venn global Equity factor finished the week down a significant -5.38% as markets grappled with the largest YoY inflation print since the 1980s.² Adding further to uncertainty is a Fed whose policy action, according to some market participants, has thus far been behind the curve.³ This weekly Equity performance is in the bottom 2% of our factor’s history,⁴ putting into perspective how challenging the current market environment has been. 

Below we show Venn’s factor performance for the tumultuous week following the CPI announcement, looking through headlines to see how important drivers of risk responded.

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 daily data for the period of June 13th - June 17th, 2022

Four Factors That Were Safe Havens While Many Markets Struggled

• The Emerging Markets (EM) factor was positive after residualizing for Equity, Interest Rates, Credit, Commodities and a global currency basket.⁵
  
  • Among equity, debt and currency components of Venn’s EM factor, the positive effect could best be observed in equities where despite being negative, EM outperformed developed markets by roughly 1.2%, aided by its meaningful allocation to China.⁶
• Despite many large cap indexes outperforming small caps over this week,⁷ Venn’s Small Cap factor outperformed after adjusting the portfolio to be market neutral. 
  • Of the 4 other market neutral equity style factors, each posted weekly returns in the bottom 3% or worse of their history. ⁸
  • There have only been 187 weeks where 4 or more equity styles have been negative, equating to 13.1% of the time since March 1995. 
• Trend Following achieved positive performance driven mainly from Equity, Fixed Income and Currency positions, while being long Commodities dragged on returns.
  • While the momentum equity style seeks to exploit relative trends between stocks, Trend Following exploits asset class trends relative to themselves. Read more about the differences here. This means Trend Following can have positive or negative correlation to any of the four asset classes at any point, despite the expectation of a market neutral exposure over time.
    • Trend Following is sometimes considered a buffer against market crashes as it begins shorting during downward movements. For example, during the global financial crisis it was positioned to be inversely correlated with markets, outperforming Venn’s Equity factor by 50.9%⁹.
    • Thus far in 2022, the same theme has held true with Trend Following up 17.7% compared to Venn’s Equity factor down -18.0%, a greater than 35% difference.¹⁰
• The Local Equity factor posted gains, suggesting home bias was beneficial for US investors during the severe market movements.

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

REFERENCEs

¹https://www.cnbc.com/2022/06/15/real-time-updates-of-the-feds-big-rate-decision-and-powells-press-conference.html

²https://www.cnbc.com/2022/06/10/consumer-price-index-may-2022.html

³https://www.cbsnews.com/news/recession-inflation-federal-reserve-inflation-bank-of-america/

⁴Data beginning March 1, 1995.

⁵Residualization accounts for the effects of the mentioned factors upfront, making the resulting return driven by a more pure EM factor.

⁶MSCI Emerging Markets vs MSCI World from 6/13/2022–6/17/2022. Source: Venn, Bloomberg.

⁷For example, the Russell 1000 outperformed the Russell 2000 by 1.2% from 6/13/2022–6/17/2022. Source: Venn by Two Sigma

⁸History begins March 1, 1995.

⁹Source: Venn by Two Sigma. Period from Sept 2008–Mar 2009

¹⁰YTD return ending June 21st, 2022.

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