Read Axioma’s informed perspectives on the status of different potential risk sources around the globe.
Risk Finally Rears Its Ugly Head
And takes a bite out of 2018
Year-end 2018 was the antithesis of the close-out in 2017. While investors reveled in large equity gains and low volatility the year before, 2018 brought the misery of steep losses and high levels of volatility. Markets were choppy throughout the year and especially in the fourth quarter, with stocks wavering between gains and losses. Major indices around the globe fell abruptly from the record levels reached in January, ending the year under water. The corresponding increase in volatility of indexes, countries, style factors, etc. suggest that managers of all stripes may want to reevaluate their portfolios to reflect the changed environment.
Top-Line Risk Drop in Q3 Masks Underlying Turmoil
Q3 2018 saw large divergences between indexes typically viewed as “risk on”-type assets and their presumably less-risky counterparts. Top-line risk was down led by the fall in market risk, but other sources—many of which are the things managers tilt on and that drive active risk—actually bucked the market trend and increased.
Risk Retreated in Q2 But...
Active Managers Need to Look Under the Hood
Markets worldwide saw large swings in Q2 2018, and while US stocks were up for the quarter, many world markets were barely in the black. Volatility remained elevated from historical lows, but has eased globally, driven by the fall in market risk. Other components of risk, however, rose in Q2 which may have an important impact on active managers.
Farewell Low Volatility…
Are we now closer to a trough or a peak?
After falling to historically low levels at the end of 2017 volatility surged in the first quarter, driven mainly, but not exclusively by market risk. Against this backdrop, interestingly, style factors remained quite well-behaved.
If “The Market Climbs a Wall of Worry” What Happens When the Market Stops Worrying?
2017 was a remarkable year, with stocks around the globe extending steep gains, while volatilities plunged to levels at or near historic lows, even in the face of a long list of geopolitical and economic events worldwide. We identified last year’s winners and losers and analyzed the factors driving this large drop in risk worldwide. Finally, we highlighted some positives, negatives and confounding data that may provide insights into the direction and volatility of markets in 2018.
Breaking Records… and Sounding Like a Broken Record
Backed by robust economic data, global stocks continued on the upward trend started in the first half of the year. While some benchmark returns advanced at a slower pace this quarter, a few (such as the Russell 2000 and TSX Composite) accelerated. North Korea tensions weighed on equity markets in August, but by September major indices were hitting fresh records. The summer lulls brought relatively muted trading activity, and markets remained calm, despite high levels of political turmoil.
Equity markets around the world had a strong run in the second quarter, with major indices hitting fresh records and contributing to the global rally in the first-half. Against a backdrop of geopolitical tensions, the tumult at the White House, the elections in the UK, the Netherlands and France, the downgrading of China’s debt, central banks signaling the liquidity spigot could be turned off, etc., stock markets kept eerily calm. Risk forecasts for major benchmarks sunk to at least 10-year lows. This report delves into the sources of risk worldwide, both those that contributed to the continued risk downturn and those that bucked the trend.
Stocks around the globe extended their post-election rally into the first quarter of 2017. Prospects of tax cuts and increased government spending, together with strong economic signals in the US, drove investors’ optimism up and pushed US benchmarks to fresh records. Most notably, the Dow Jones Industrial Average exceeded the 20,000 milestone in January and topped 21,000 in March, while the S&P 500 posted its largest quarterly gain since the end of 2015.
2016 was a year of surprises. The precipitous decline of the Chinese market in January pushed most major benchmarks’ returns down and sent risk to the highest levels of the year. While markets rebounded and their volatilities receded for most of the second quarter, stocks dropped again and indices experienced another spike in risk following the unexpected result of the UK referendum at the end of June. This drop, however, was short lived, and markets rebounded quickly. Equity markets have posted strong gains since Nov. 8, and the year concluded with multiple benchmark returns in the black, some at record highs, while volatilities remained relatively low.
By the time the third quarter rolled around, markets were experiencing periods of both severe unrest and eerie calm. The initial shock of the Brexit vote sent equity market volatilities and correlations to new heights in July. But Brexit concerns faded rapidly. Asset correlations made a U-turn by the end of July and in most regions risk forecasts fell to their lowest levels since the summer of 2015 by quarter-end. The summer months were otherwise relatively calm, with trading activity slowing down greatly in August. Large swings in oil prices continued.