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.

 

Interested in your portfolio's exposures to these factors?

 

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.

 

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. Any statements regarding planned or future development efforts for our existing or new products or services are not intended to be a promise or guarantee of future availability of products, services, or features.  Such statements merely reflect our current plans.  They are not intended to indicate when or how particular features will be offered or at what price.  These planned or future development efforts may change without notice. 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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