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Volatility & Beta Up Big While Profitability Slowly Recovers

Omer Cedar

Volatility & Beta Up Big While Profitability Slowly Recovers

Omer Cedar
January 13, 2019

This week brought with it some mixed news, between the potential jobs impact stemming from the government shutdown, increased optimism over US-China trade, and recent comments from the Fed about the need for “patience”. With regard to factors, we're seeing signals that indicate that we're in the midst of a return to a “risk-on” environment, with Volatility and Market Sensitivity both getting bid up. At the same time, Profitability (Quality) continues to slowly recover. Let's dig in.

US Market

The US Market factor (99% correlated to the S&P 500) saw a substantial rebound, up 6.53% since last Friday. The combination of Friday's strong jobs print, trade optimism, and a positive forecast out of GM had investors buying up stocks after the recent bout of pain in the market.

 

market+intercept+20190110

Factor Update

Here's an update on how some key factors have changed in our normalized return indicator over the past week.

Screen+Shot+2019-01-11+at+5.31.28+PM
 
In our Nov 4 Factor Spotlight - Short Squeeze or Sustainable Rebound?, we discussed the relationship between the market and the Profitability, Volatility, and Market Sensitivity factors. We posited that based on the historical interplay between the factors, we would want to see a rally in all three factors before crowning any factor rally a true rebound versus short covering. As you can see, Market Sensitivity and Volatility both saw a substantial rally over the past few days. Profitability saw a recovery, but at a much slower clip.

Volatility

This factor was the highest performing factor over the past week, up 1.15% and a whopping +1.44 standard deviations on a normalized basis since Jan 4. A rally of that magnitude in Volatility serves as a strong signal that investors have been eager to add more risk to their portfolios. 
Volatility+Cum+20190111
Volatility+Norm+20190111
Market Sensitivity

Similar to Volatility, Beta enjoyed a major recovery - up 2.47% in absolute terms and +1.13 standard deviations on a normalized basis. This suggests that investors were happy to put money into names that move in step with the market, another indication that many were looking at recent market turmoil in their rearview mirror.
Beta+Cum+20190111
Beta+Norm+20190111
 
Profitability

Lastly, we saw positive movement for Profitability (one of the pillars of “Quality), but not to the same extent as the other two factors that we've tracked here.
Profitability+Cum+20190111
Profitability+Norm+20190111
In the above-mentioned article, we explored how historical recoveries were punctuated by huge rallies in all three of these factors. Profitability has drifted upwards, but nowhere close to the “vertical line” that we've seen in Volatility and Market Sensitivity. As a result, we can say that we may be in early innings of a true market rally, but we'd like to see real money come back into Profitability before we're able to make that claim. We may be heading in that direction, and will keep you apprised on these factors as the story develops.

As always, if you'd like to see what your portfolio's relationship is with any of these factors, or would like to better understand how you can mitigate factor exposure, please don't hesitate to reach out.
 
Regards,
Omer

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Beta Profitability Volatility 2019

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