The first half of 2022 was officially the worst first half of the year for developed market equities in half a century.1 In the month of June specifically, Venn’s global Equity factor was down -7.43%, driven in part by global inflation, increasing recession fears, and continued energy volatility. Venn’s Interest Rate factor, which represents long currency hedged 7-10 yr global treasury bonds, was down -1.15% in June indicating how fixed income and equities fell together.
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 - June 2022
When we analyzed our holistic set of risk factors (above), we found many of the same trends in performance as we did during the week of the 75 bps June Fed hike. Similar themes mentioned in that Vennsights article include:
- Trend Following has been living up to its reputation as a market hedge.
- Some other top YTD performers wavered in June on increased recession fears (more on this later), making Trend Following’s continued positive performance even more notable.
- Emerging Markets has been outperforming on the back of continued China equity market strength.2
- Market neutral equity factor styles have been falling together, with the exception of Small Cap.3
- It is worth noting that of the equity factor styles, Momentum’s historic underperformance of -9.53% in June was in part driven by energy reversing its upward trend.4
Given the similar themes between our mid-month and full-month report, we thought it would be interesting to compare YTD factor performance with that of June.
Source: Venn by Two Sigma
Value and Commodities: What’s Worked and What’s Changed?
What’s Worked?
- Through May, both the Value and Commodities factors were positive every month, returning 24.77% and 18.11% respectively.
- Value tends to perform well in periods of higher inflation and rates. Growth, often considered the short position to value, has struggled as the present value of future cash flows have decreased due to higher-long term interest rates.5
- Commodities have also benefited from rising inflation via their role as real assets. Additional tailwinds include supply chain disruptions stemming from COVID-19 and the war in Ukraine.
What’s Changed?
- On June 15th, the Fed hiked by 75 bps. This was 25bps more than what was expected at the start of the month, signifying the central bank’s determination to fight inflation at the cost of downward pressure on economic growth. As a result, some market participants say the risk of recession is now approaching 50%.6 Both Commodities and Value reacted sharply, falling -3.46% and -4.06% over the remainder of the month.
- Recession fears sparked concerns for commodity demand. Corn and copper both dragged meaningfully on return in June. Natural gas had the added headwind of an excess supply shock, causing it to fall more than 30% in June.7
- Value firms tend to have higher fixed capital, which is more inefficient in periods of declining economic growth and lower consumer demand.8 As a result, increased recession fears were a likely contributor to Value’s reversal in June.
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://am.jpmorgan.com/gb/en/asset-management/adv/insights/market-insights/market-updates/monthly-market-review/
2 China benefited from loosening COVID restrictions in June. MSCI China was up 6.6% in June. MSCI EM was down -6.6%, versus MSCI World (developed equities) down -8.7% for the month.
3 Crowding is also considered an equity style and was positive in the month of June, but was down in the week of the June Fed hike.
4 Source: Venn by Two Sigma. As an example, the global energy equity ETF, IXC, was down -14.8% in June.
5 For example, YTD through May, the Russell 1000 Value is down -5.3% and the Russell 1000 Growth is down -22.2%. MSCI EAFE Value is down -2.4% and MSCI EAFE Growth is down -19.9%. Source: Venn, by Two Sigma.
8 Lu Zhang, “the Value Premium”, Journal of Finance”, VOL.LX, NO.1, pp. 2. February, 2005
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