In October, the Dow had its best monthly performance since 1976.1 For perspective on just how long ago that is, 1976 is the year that Apple was officially formed.2 


It is hard to know what this rally means, especially as high inflation and rates continue to roil markets. This is reiterated even further in Congress's open letter to Jerome Powell, reminding him of his comments on “pain."  In their letter, members of Congress cite various surveys claiming that we are increasingly likely to experience recession as a result of the Fed’s policy decisions.


We have previously discussed how factors such as Equity and Interest Rates have been meaningfully responding to US central bank policy, both positively and negatively. With this in mind, it is worth noting that there were no major policy decisions made this month. Let’s take a look at the performance of Venn’s Two Sigma Factor Lens in October.

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 - October 2022


Most Equity Styles Were Up Alongside Our Equity Factor

Five out of six of our equity style factors were positive in October. Specifically, Momentum, Low Risk, Value, Quality, and Crowding were in the green, with Small Cap being in the red. 


This may seem intuitive, because the Equity factor was up. In truth, our equity styles are long/short exposures, meaning they aim to strip out the effects of the Equity Factor. Taking that idea one step further, there is no guarantee that the long and short portfolios have the same market beta. Thus, we also adjust both portfolios to have a beta of 1.


Equity Style Factor Performance Independent of Equity Moves

Lack of Equity Factor exposure is more evident in YTD returns. Our Equity Factor is down close to -18%, but four out of six equity styles are positive for the year. To be clear, it's not that we expect Equity Styles to move in the opposite direction to our Equity Factor, but we do think of them as independent. 

Source: Venn by Two Sigma. YTD as of 10/31/2022


Value in particular has done well thus far in 2022. This is an expected phenomenon amid higher inflation and rates, as investors tend to prefer companies with cash flow closer to the present. Momentum also continues to pick up steam as inflation and rising rates persist, and this equity style capitalizes on those robust trends.


A Note on Emerging Markets

This month we also saw our Emerging Markets Factor post a return in the bottom 3% of historical returns back to 1995. Drivers of this include removing the positive effects from the Equity Factor via residualization, but also challenged performance of Chinese equities over the month. This poor performance came as markets reacted to President Xi Jinping paving the way for a third term, fearing continuation of his increased tech regulation and zero covid policy.3 


For example, the MSCI Emerging Markets index was down -3.1%, while the MSCI Emerging Markets index ex-China was up 3.1%. Even excluding China, it is worth noting that MSCI World, representing developed-world equity performance, was up 7.2%.


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References to the Two Sigma Factor Lens and other Venn methodologies are qualified in their entirety by the applicable documentation on Venn.






References to the Two Sigma Factor Lens and other Venn methodologies are qualified in their entirety by the applicable documentation on Venn.

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.

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