Source: Venn as of March 18, 2020 using the USD version of the Two Sigma Factor Lens.

Time period: March 9 - 13, 2020.

 

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Markets and Factor Performance Summary

  • A tumultuous week in the markets started with activity on Sunday, March 8th. Saudi Arabia announced oil price cuts for consumers in Asia, Europe, and the United States. This announcement came after Russia failed to reach an agreement with OPEC and other oil producers to cut production. The supply shock was layered onto the decrease in demand resulting from the global coronavirus outbreak and sent oil prices over 20% lower.1
    • The global Equity factor fell 7.33% on Monday, March 9th. 
    • The Credit factor was also severely impacted, down 5.38% on March 9th, even after it was residualized to the Equity and Interest Rates factors. Energy company issuers (that could default as energy prices fall) constitute over 10% of the U.S. high-yield market.2
    • The Commodities factor was down 0.92% on March 9th, despite oil prices nosediving. The factor’s underlying index (which has a target weight of ~30% to energy commodities) suffered 4.15% that day.3 However, the factor removes the return from shared risks with the Equity and Interest Rates factors. As an example, the index’s recent 0.4 beta to the Equity factor indicated that a little less than half of Equity’s 7.33% losses were “added back” in constructing the residualized Commodities factor.4
  • Global stocks recovered on Tuesday, but returned to their downward trend on Wednesday and Thursday amid various coronavirus-related news, such as President Trump’s announcement of a European travel ban to limit the spread of the coronavirus.5
  • Equity markets bounced back on Friday afternoon on optimism around President Trump’s news conference and Congress’ progress toward a coronavirus aid package.
    • The Equity factor posted 5.52% gains on Friday, ending the week -11.30%. 
      • The Local Equity factor was partly supported by the U.S. outperforming global equity markets last week, pushing ahead on Friday afternoon when other markets were closed.
      • In terms of the equity style factors, the Quality factor posted the largest gains with the Profitability component leading the pack (indicating that companies with higher profitability outperformed their less profitable counterparts). Low Risk on the other hand continued its losses from late February, after a brief recovery the first week of March. Losses appear to be driven primarily by the “betting against beta” component (i.e. stocks with lower betas underperformed stocks with higher betas).6
  • The Interest Rates factor actually ended the week -2.01%. 10-year government bond yields in countries such as the U.S., Germany, and the U.K. ended the week higher after initially dropping on Monday.7

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REFERENCES

1Sources: NPR article “Oil Prices, Stocks Plunge After Saudi Arabia Stuns World With Massive Discounts” on March 8, 2020 and Trading Economics.

2Source: Financial Times article “Oil price war spells danger for US junk bonds” on March 8, 2020.

3Source: Bloomberg.

4Source: Venn.

5Source: Reuters article “Plunging Wall Street stocks end record bull run” on March 11, 2020.

6Source: Venn.

7Source: Trading Economics.

 

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. 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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