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 - March 27, 2020.

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Markets and Factor Summary

• Global Equity markets ended the week notably higher for the first time in six weeks.
  • Investors processed unprecedented monetary and fiscal stimulus measures by central banks and governments. 
    • In the U.S. for example, the government passed a $2 trillion economic stimulus package providing relief to businesses, health care providers, and workers impacted by the coronavirus pandemic.¹ Additionally, the Federal Reserve said it would buy new securities, such as corporate bonds, as well as pledged unlimited quantitative easing to support markets.
  • We suspect a contributor to the rise in equity markets last week was pensions (and potentially other asset allocators) rebalancing to target allocations (especially around the month and quarter-end), as poor performance across stocks during the market turmoil likely distorted asset allocations.
  • The U.S. equity market, as proxied by the S&P 500 and the MSCI USA indices, outperformed global equities, boosting the Local Equity factor.
  • While emerging markets posted positive returns across all three asset classes (i.e., equities, debt, and currencies) last week, emerging market stocks generally underperformed their developed counterparts, contributing to the negative return to the residualized Emerging Markets factor. 
    • South Korea posted strong gains, keeping up with developed equity markets. Indian stock returns were effectively flat, as the nation saw an increased number of coronavirus cases, prompting Prime Minister Narendra Modi to announce a country-wide lockdown for three weeks.²
• While the underlying index for the Commodities factor ended the week higher (losses in some sectors, such as energies, were more than offset by gains in other sectors, such as precious metals), the residualized factor performance was negative once we removed the return attributable to the upward move in global stocks.
• The Local Inflation factor in the U.S. was supported by inflation-linked bonds outperforming Treasurys of the same duration. The ten-year breakeven inflation rate, which represents inflation expectations, rose last week after nose diving earlier in the month.³
• In terms of the macro style factors, the underlying index for the residualized Equity Short Volatility factor posted gains, but those were more than erased when accounting for the index’s positive equity beta.⁴ Foreign Exchange Carry exhibited a similar story -- the raw factor, which goes long G10 currencies with high local interest rates and short those with low local interest rates, posted small, positive returns. However, once we account for the raw factor’s equity beta, the residualized factor’s overall returns were negative.
• In terms of the equity style factors, stocks with positive one-year Momentum continued their outperformance in the global equity rally. We also saw a reversal in the performance of:
  • Low Risk, which struggled earlier in the month (see prior Venn Factor Performance Reports) and posted a comeback last week.
  • Quality, which lost 15% of its gains from earlier in the month. We saw a reversal in terms of component performance:
    • The four components (Leverage, Earnings Quality, Profitability, and Investment Quality) that posted gains earlier in the month reversed course last week, all delivering negative returns. 
    • Earnings Variability, which was the sole negative performer earlier in March, was the only component to deliver a positive return last week.

REFERENCES

¹Source: The Washington Post article “Trump signs $2 trillion coronavirus bill into law as companies and households brace for more economic pain” on March 27, 2020.

²Source: The New York Times article “Modi Orders 3-Week Total Lockdown for All 1.3 Billion Indians” on March 24, 2020.

³Source: FRED Economic Data.

⁴The Cboe Volatility Index was down ~1% last week (from 66.04 on Friday, March 24, 2020 to 65.54 on Friday, March 27, 2020). Source: Cboe website.

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