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The final week of February was afflicted with a bout of
volatility not seen since September 2011. This latest market tumult
marked the worst weekly loss for US stocks since the financial
crisis, as stocks entered correction territory amid intensifying
fears surrounding the coronavirus' impact on the global economy.
Given this extreme level of volatility, in this special report we
review daily factor and style model performance to highlight key
developments in the course of the market rout.
• Low beta and positive earnings revisions were two highly
rewarded themes in the final week of February
• Small caps, value stocks and high bankruptcy risk firms
suffered the most as volatility escalated
• Among our style models, the Historical Growth Model weathered
the storm the most successfully February style model and factor
returns
February style model and factor returns
We review daily factor and style model performance in February
across a representative group of our 400+ US factor library in
addition to our style models - Deep Value, Earnings Momentum, Price
Momentum, Historical Growth, Relative Value and Value Momentum
Analyst II. Performance is based on daily decile return spreads,
where the spread is computed as the difference in the
equal-weighted return at the top (decile 1) and bottom (decile 10)
tails. The universe is our US Large Cap universe, which consists of
approximately 1,000 of the largest cap names.
First, from a factor perspective, we focus our results on
several factors of interest (Figure 1) covering value, momentum,
size, risk and short sentiment signals, namely Book-to-Market, TTM
EBITDA-to-Enterprise Value, 3-M Revision in FY2 EPS Forecasts,
Industry-adjusted 12-Month Relative Price Strength, Natural
Logarithm of Market Capitalization, 60-Month Beta, Altman Z-score
and Demand Supply Ratio.
Through 21 February, factor performance was fairly stable, with
3-M Revision in FY2 EPS Forecasts taking a slight lead over
60-Month Beta on a cumulative basis, two themes that carried over
from the prior month. Likewise, TTM EBITDA-to-Enterprise Value and
Natural Logarithm of Market Capitalization extended January's
underperformance into the first three weeks of February.
However, the extreme volatility in the final week of February
had a significant impact on factor performance. The riskoff trade,
captured by 60-Month Beta, catapulted into the lead. Investors also
turned to analyst outlook, gauged by 3-M Revision in FY2 EPS
Forecasts, to search for firms whose earnings were forecasted to
best weather the effects of the coronavirus. At the opposite
extreme, high bankruptcy, value and small cap stocks suffered the
most, as confirmed by Altman Z-score, TTM EBITDA-to-Enterprise
Value and Natural Logarithm of Market Capitalization,
respectively.
For another perspective, we compare average daily decile spreads
month-to-date through 21 February with those in the last week of
the month (Figure 2) to provide a more focused view of the extreme
behavior between the two periods. From this vantage point, the
results more clearly highlight the fact that investors traded in
droves out of high bankruptcy risk names into low beta stocks.
Consistent with the above findings, high momentum also benefited at
the expense of value, where Book-to-Market, the more traditional
value measure, took the brunt of the trade. Furthermore, firms with
the highest earnings revisions outperformed and small caps lagged,
while investors mostly disregarded sentiment conveyed in the
securities lending market.
Lastly, turning to style model performance (Figure 3),
cumulative spreads through 21 February resided in negative
territory for all models with the exception of Historical Growth,
which far outshined the other styles, suggesting that strong
corporate fundamentals were a key driver of performance. As
expected given our above observations, the Deep Value Model was the
weakest performer through the 21st. Interestingly, during the last
week of February, the Historical Growth Model expanded its
outperformance relative to the other models, while Value Momentum
Analyst II declined the most.
Posted 06 March 2020 by Chris Hammond, CFA, Executive Director – Research Signals, IHS Markit
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
For another perspective, we compare average daily decile spreads
month-to-date through 21 February with those in the last week of
the month (Figure 2) to provide a more focused view of the extreme
behavior between the two periods. From this vantage point, the
results more clearly highlight the fact that investors traded in
droves out of high bankruptcy risk names into low beta stocks.
Consistent with the above findings, high momentum also benefited at
the expense of value, where Book-to-Market, the more traditional
value measure, took the brunt of the trade. Furthermore, firms with
the highest earnings revisions outperformed and small caps lagged,
while investors mostly disregarded sentiment conveyed in the
securities lending market.
