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 - March 2020.

Markets and Factor Summary for March 2020

• March was a very painful month for many investors. The prices of risk assets dropped substantially due to the rapid spread of the coronavirus worldwide and its real-time and longer-term expected impact on the global economy.
  • The global Equity factor suffered losses, returning -12.64% and posting its third worst monthly performance since the start of the Two Sigma Factor Lens’ return history (March 1995).
    • The Local Equity factor in the USD version of the lens posted gains, as U.S. equity markets outperformed global developed markets on a risk-adjusted basis. 
    • European equity markets dropped more than those in the U.S. and Asia,¹ as Italy was the epicenter of the pandemic for most of the month, and the policy response from the European Central Bank was more limited relative to other countries / currency regions.²
  • The residualized Credit factor came under pressure. U.S. and European credit spreads increased,³ and many investment grade debt issuers were downgraded over the month by credit agencies.⁴
  • The residualized Commodities factor was down on the month. The largest contributor was the performance of energy-related commodities. Lower demand due to lower economic activity driven by large-scale quarantining as well as supply issues around a price war between Saudi Arabia and Russia (two major oil exporters) caused oil prices to collapse by approximately 50%.⁵
• The global Interest Rates factor was marginally down. The factor is constructed using government 7-10 year bonds, so the factor falls as interest rates rise. While the 10 year government bond yield in the U.S. declined notably from 1.1% to 0.7% and reached a low of 0.3% mid-month,⁶ certain other countries (e.g., Germany, France, and Japan) actually experienced a slight increase in their 10 year government bond yields, despite monetary and fiscal stimulus measures.⁷
• The Foreign Currency factor declined as the USD was in high demand relative to other G10 currencies. The USD became relatively scarce despite the Federal Reserve’s efforts to increase liquidity.⁸
• The Emerging Markets factor sold off with all three components (equity, debt, and currency) detracting. In particular emerging market currencies sold off relative to developed market currencies, as capital came out of riskier currencies and towards those perceived to be safer like the USD (see the Foreign Currency bullet above).
• Divergence in the equity style group of factors showed Quality and Momentum strongly outperforming, while Small Cap, Value, and Low Risk experienced losses.
  • Quality posted the best returns of any factor in March. In particular, the Profitability and Leverage components did very well as the market punished highly leveraged, unprofitable companies.
  • Momentum struggled in the second week of the month but staged a recovery in the back half of March to end positive (March 17-31 the factor was up 5.5%).
  • Small Cap stocks underperformed their larger counterparts, as small cap companies generally can be more sensitive to economic downturns than larger ones. In the U.S., elevated debt levels of small caps and a rising percentage of small caps not generating earnings highlights the vulnerability of small caps to the worsening economic conditions.⁹
  • All four Value components delivered negative returns, led by Dividend Yield. High dividend-paying stocks went out of favor as the market expects lower dividend growth going forward, and some companies announced dividend suspensions or reductions.¹⁰
  • The worst performing equity style factor was Low Risk. It started the first few days of the month recovering losses from February, posting 6% returns through March 4th. The factor then underperformed, reaching an intra-month low of -20% on March 23rd, and recovered through the end of March to finish with -13% returns.¹¹
    • We believe Low Risk suffered in March for a couple of different reasons. First, when equity markets sell off indiscriminately like they did last month, realized betas compress, and the performance of stocks may not be in line with what their predicted betas might suggest. Second, the factor, in addition to some of the other equity styles, may have been impacted by “dash-to-cash” behavior, as many asset managers, such as hedge funds, reduced leverage, selling their longs and covering their shorts, and raised cash.¹²
    • Both components (Beta and Residual Volatility) of the Low Risk factor detracted. 
    • It’s important to note that the equity style factors have a global universe and are constructed to be close to beta neutral (i.e., the factors can have dollar tilts) and are not sector-neutral (i.e., the factors can have sector tilts). These design choices could have an impact when comparing Low Risk to other “low volatility” or “low beta” factors.
• In terms of the macro style factors:
  • Even after the factor was residualized to Equity, Equity Short Volatility posted losses in March, struggling as U.S. equity market volatility spiked. 
  • The Fixed Income Carry factor lost. One detractor was the factor’s largest short position in Canadian government bonds, as the Canadian 10 year yield decreased over the month.¹³
  • Trend Following was supported mostly by following a negative trend in commodity markets. The Bloomberg Commodity Index exhibited poor performance in the year leading up to March 2020, and as noted in the Commodities bullet above, the asset class continued to struggle.
    • Trend following in fixed income was also additive, although to a lesser extent. Equities and currencies trend following both detracted.

A Quick Note on the Week's (March 30 - April 3) Market and Factor Performance

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 weekly data for the period March 1, 1995 - April 3, 2020.

• Notable macro factor performers:
  • Equity markets fell again, with April 1st being the worst day as global equity markets were down approximately 4%. Investor sentiment declined as U.S. officials warned of a “painful” two weeks ahead in terms of the death toll from the coronavirus pandemic.¹⁴
  • The USD continued to rise as investors sought safe-haven assets, putting negative pressure on the Foreign Currency factor.¹⁵
  • Local Inflation saw gains, as inflation expectations began to recover after falling meaningfully earlier in the month.¹⁶
• Notable macro style factor performers:
  • The best performing factor was Equity Short Volatility, which benefited as U.S. equity market volatility declined from previously elevated levels.
  • Fixed Income Carry posted positive returns, in part supported by the factor’s recent long positioning in Australian government bonds which were up on the week as the 10 year yield in Australia dropped.¹⁷
• Notable equity style factor performers:
  • As mentioned above, March was a difficult period for Small Cap and Value -- and this week was no exception.
    • In the U.S., the Russell 2000 Index (small cap) underperformed the Russell 1000 Index (large cap) by over 4%.¹⁸
    • All four Value components were down; Book-to-Price led the pack.
  • The Quality factor was supported by three of its five components. Similar to what we observed for the overall month of March, Leverage and Profitability were the strongest performers, as investors punished highly leveraged, unprofitable companies.

REFERENCES

¹Source: Venn by Two Sigma using MSCI indices.

²Source: The New York Times article “To Take On Coronavirus, B.O.E. Cut Rates. Europe’s Central Bank Has Fewer Options.” on March 11, 2020.

³Source: Federal Reserve Economic Data.

⁴Source: Financial Times article “Rating agencies brace for backlash after rash of downgrades” on April 2, 2020.

⁵Sources: Venn by Two Sigma and Trading Economics website: Crude Oil WTI.

⁶Sources: U.S. Department of the Treasury and CNBC article “10-year Treasury yield hits new all-time low of 0.318% amid historic flight to bonds” on March 8, 2020.

⁷Source: Trading Economics website: Germany 10Y Bond Yield, France 10Y Bond Yield, and Japan 10Y Bond Yield.

⁸Source: Financial Times article “Global funding squeeze forces dollar higher” on March 17, 2020.

⁹Source: The Wall Street Journal article “Small-Caps ‘Eviscerated’ in Stock Market Rout” on March 25, 2020.

¹⁰Sources: Northern Trust webinar "FACTOR PERFORMANCE AND OUTLOOK FOR VOLATILE MARKETS" and The Wall Street Journal article “Europe’s Banks Urged to Cut Dividends to Shore Up Capital” on March 31, 2020.

¹¹Source: Venn by Two Sigma as of April 13, 2020.

¹²Source: Financial Times article “Hedge fund bets hammered as industry retrenches amid cash dash” on March 19, 2020.

¹³Source: Trading Economics website: Canada 10Y Bond Yield.

¹⁴Source: The New York Times article “Wall Street Dives 4% as Virus Pandemic Fears Intensify” on April 1, 2020.

¹⁵Source: CNBC article “Dollar gains on safe-haven bids; shrugs off horrible US jobs number” on April 3, 2020.

¹⁶Source: Federal Reserve Economic Data.

¹⁷Source: Trading Economics website: Australia 10Y Bond Yield.

¹⁸Source: Venn by Two Sigma as of April 9, 2020.

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