Factor performance remains linked while stocks decouple
Research Signals - August 2018
US stocks continue to decouple from other regional markets this year, particularly versus emerging markets. At the same time, investors look for the Federal Reserve to continue on its rate increase trajectory, contrary to other major central banks. However, buoyant US stocks saw positive performance from price momentum factors, at the expense of valuation, a theme that carried over to several other developed markets (Table 1), as investors wait to see if trade and currency concerns plaguing emerging markets will spill over to developed economies.
- US: High momentum large and small cap names saw a spike in performance, with 11.1 and 6.6 percentage point swings, respectively, in Industry-adjusted 12-month Relative Price Strength spread performance since June
- Developed Europe: Valuation factors were an underperforming group, including such measures as TTM Free Cash Flow-to-Enterprise Value and Industry Relative Leading 4-QTRs EPS to Price
- Developed Pacific: Book-to-Market dropped from being a positive indicator in markets outside Japan to a strong negative signal, with a 12.5 percentage point swing to the weakest spread performance since February 2009
- Emerging markets: Large cap names outperformed, alongside lower risk names gauged by Average Monthly Trading Volume-to-Market Cap
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