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 - May 2020.

Markets and Factor Summary

• The global Equity factor experienced strong performance in May. Global stocks rose on optimism surrounding the restart of the global economy and partial easing of COVID-19 lockdowns, which generally outweighed concerns around rising US-China tensions.¹
  • The US equity market in particular outperformed other countries,² boosting the Local Equity factor in the USD version of the factor lens.
  • The Equity Short Volatility factor gained as the VIX fell nearly 20% over the month.³
  • In terms of the equity style factors:
    • Small Cap and Momentum stocks were beneficiaries of the risk-on rotation.
    • Quality also did well, with profits from the Profitability and Leverage components outweighing losses from the Investment Quality, Earnings Variability, and Earnings Quality components.
    • Value suffered the worst performance of any factor in May, registering its 8th worst month in the factor’s history going back to 1995 and continuing its downward trend for the year (the factor’s return is -25% YTD through May 31).⁴ In May, Value suffered from higher exposure to cyclicals that lagged, such as financials and energy, versus those that led, such as industrials and materials.⁵
    • Defensive styles struggled in the risk-on rally, sending Low Risk lower.

• Safe-haven currencies, such as the USD and JPY, fell versus other G10 currencies, boosting the Foreign Currency factor in the USD and JPY versions of the factor lens. 
  • Another notable currency move was the EUR strengthening, due in part to improved risk appetite and the European Commission setting out proposals for joint European Union fiscal policies to speed up the economic recovery of COVID-19.⁶
• The Interest Rates factor, represented by a global government 7-10 year bond index, fell in the first half of the month as yields rose, but recovered in the second half to end with a small gain. 
• The residualized Commodities factor was boosted by a strong month for oil. Crude finished up over 60% in May,⁷ supported by coordinated OPEC+ supply cuts, US shale producer shut-ins,⁸ and post-lockdown demand growth.⁹
  • All other commodity sectors saw gains, with the exception of softs and grains.¹⁰
• Trend Following saw losses in all four asset classes, but the largest detraction was from trend following in commodities. The factor was generally positioned as short commodities, given the asset class’ poor performance in the year and six months leading up to May. The rebound in commodities last month therefore detracted from the factor’s performance.

REFERENCES

¹Sources: The New York Times article “Reopening Optimism Helps Wall Street” on May 27, 2020, CNBC article “Dow rallies more than 500 points for a second day, closes above 25,000 for first time since March” on May 26, 2020, Reuters article “U.S. stock market swings higher despite rising U.S.-China tensions; oil up” on May 15, 2020, Financial Times article “US Senate passes bill that puts some Chinese listings at risk” on May 20, 2020, and CNN article “China approves controversial national security law for Hong Kong” on May 28, 2020.

²Source: Venn as of June 10, 2020. The MSCI USA Index posted 5.13% returns in May versus 4.24% for the MSCI ACWI Index, currency hedged.

³Source: http://www.cboe.com/vix

⁴Source: Venn by Two Sigma as of June 8, 2020.

⁵Source: Sector performance proxied using iShares Global ETFs on Venn as of June 8, 2020. The sectors’ value factor exposure was measured over the prior three year period using data as of June 8, 2020.

⁶Sources: Venn as of June 2020, Trading Economics EURJPY Exchange Rate, Bloomberg article “EU Aims to Back Struggling South With Fiscal Shock and Awe” on May 27, 2020, and Reuters article “Dollar dips as improved risk appetite, EU recovery fund hopes boost euro” on May 26, 2020.

⁷Source: Venn by Two Sigma's rolled Crude Oil contract as of June 8, 2020 with data from Commodity Systems Inc.

⁸Source: CNBC article “Six US oil firms are expected to shut 300,000 barrels per day of production in May and June” on April 29, 2020.

⁹Source: Reuters article “Column: Recovering oil demand could drive market into deficit by July - Kemp” on May 15, 2020.

¹⁰Source: Sector performance proxied using iPath Bloomberg SubTR ETNs on Venn as of June 8, 2020.

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.