Notable Performance of Factors in the Two Sigma Factor Lens
- Value and Momentum both had a very notable month, with each experiencing 3rd percentile outlier levels of performance, as evidenced by the table above.
- Leading up to September, Momentum had been outperforming Value for the year (16.7% YTD performance through August for Momentum versus -11.4% for Value).1
- However, starting the second week of the month Momentum experienced a large sell-off, while Value soared on a growth to value rotation. Performance across September 9th and 10th was more than 6 standard deviations relative to historical two-day moves for both factors.2 This may be symptomatic of an unusually elevated negative correlation between the factors, with rolling correlations hovering around -0.9 for most of the month versus a historical average of -0.5.3
- From a sector perspective, Momentum had benefited earlier in the year from being short cyclical sectors and long defensive sectors, while Value had suffered from being long cyclicals. That positioning led to Momentum significantly underperforming Value early in September when improving sentiment around growth and trade led to cyclicals outperforming defensives.
- Local Inflation also posted a negative return on the month, as inflation-linked bonds in the U.S. underperformed Treasuries.
- While the underlying index for Equity Short Volatility posted gains, the residualization to the Equity factor, which was up over 2% for the month, caused an overall negative return for the factor.
- The Local Equity factor delivered 18th percentile performance as the U.S. equity market generally underperformed the rest of the world.
- Finally, while Commodities ended the month slightly up, performance intra-month was more interesting. The factor was up nearly 3% on Monday, September 16th, as markets priced in the effects of the bombing on Saudi Arabian oil facilities. Almost half of those gains were lost on the following day when Saudi Arabia assured markets that they could return to normal output levels by the end of the month.4
- Additionally, precious metal performance weighed on the Commodities factor, as gold and silver both posted negative returns in September.
- Additionally, precious metal performance weighed on the Commodities factor, as gold and silver both posted negative returns in September.
REFERENCES
1 Source: Venn by Two Sigma.
2 Consecutive two day standard deviation levels were calculated using the mean and volatility of rolling two day performance for each factor going back to January 2003.
3 Source: Venn, using daily data to calculate rolling 36 day correlations going back to January 2003.
4 Source: Wall Street Journal article "Saudi Arabia Set to Return to Normal Oil Production Levels by End of Month" on September 17, 2019.
Median and percentile measures 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 January 2003 - September 2019.
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