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Decline - I am not a wholesale client

We covered in our last blog post how the v-shaped recovery appeared nearly complete through the first half of 2020. Despite a staggering 34% decline, investors poured back in as the “Fed put” took hold. While you might think the pandemic’s shock to the market might have returned it to a more stable position, we’ve actually seen a few metrics in the Intech Equity Market Stress Monitor® shift significantly over the past 12 months in ways that represent potential market risk of one kind or another.

Capital concentration, a measure of how capital is distributed between stocks, steadily increased (capital moved toward the larger-cap stocks) in the second quarter. This effect was especially prevalent in the U.S., where the S&P 500 is now at the 87th percentile of capital concentration – an extreme level based on the past 40 years. As seen in the figure below, this metric ebbs and flows over time, but does not tend to stay near historical extremes for too long.

 

2 - Capital Concentration - SP 500 Index


Correlation of returns, a measurement of the similarity in stocks’ absolute returns, is also approaching historical highs in global equity markets. This metric reflects potential groupthink and heightened systematic risk as stocks’ returns within different equity indexes begin to move in similar directions.

 

2- Correlation of Returns


As stocks have been moving more in tandem, the dispersion of returns (also known as cross-sectional volatility) has also increased in major equity indexes, reflecting greater differentiation between stocks’ excess returns relative to their index. This change has the potential to increase the impact of stock-specific effects in actively managed portfolios.


3 - Dispersion of Returns

 

The combination of these moves in market structure can be more difficult for active managers because of the lack of diversification potential. The good news: we’ve been here before. While levels near the margins can persist for a short while, they have reverted to median levels eventually. While aspects of equity markets during the first half of 2020 have been challenging for managers with diversified portfolios, we believe this approach is still most prudent over a full market cycle.

See for Yourself

We’ve only scratched the surface in these observations. Take a deeper look with the Intech Equity Market Stress Monitor®, which offers five market risk indicators and 21 global and regional equity benchmarks to explore interactively.

 

The information expressed herein is subject to change based on market and other conditions. The views presented are for general informational purposes only and are not intended as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service, or fund nor do they purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. This information should not be used as the sole basis for investment decisions. All content is presented by the date(s) published or indicated only, and may be superseded by subsequent market events or other reasons. Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal and fluctuation of value.

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