Last week we had focused on Volatility’s first major trend reversal since the Financial Crisis, adding its bullish 2020 turnaround to the growing list of unusual market behaviors we’ve seen in the COVID era. We compared sector drivers and correlations between today and 2009, and uncovered startling disparities alongside some remaining scraps of common ground. This week, we dig deeper into the securities behind Volatility’s upward trend and try to get a better handle on what is driving its performance.
Volatility’s YTD Performance
In continuing to analyze the DNA of the Volatility factor, we have seen a 'runaway Volatility' effect, where securities with historically low exposure to Volatility are showing major increases to the factor. We saw something similar with Beta earlier in the year and a similar effect has now spread to Volatility.
The top names in Energy and Health Care saw similar trends in Volatility exposure, with Gulfport Energy (GPOR) seeing an increase of over 1.5 standard deviations and Inovio Pharmaceuticals (INO) increasing by close to 2.5 standard deviations.
Interestingly, it’s not only the current high Volatility stocks that are seeing these drastic shifts in exposure, but stocks that have had high exposure to this factor previously no longer do, and stocks that used to carry low exposure are at long last joining the high Volatility group.
Volatility is Running Rampant Everywhere
Possibly more relevant than the high Volatility names that are becoming even higher Volatility are the names that are completely switching direction.
The average Volatility exposure of for the low Volatility names increased over 0.5 standard deviations from -0.74 to -0.23.
For the high Volatility portfolio, we see a similar trend, though in the opposite direction. High Volatility names as of early April actually decreased their Volatility exposure on average! Names that were historically high Volatility decreased exposure by almost 0.25 standard deviations on average from 1.74 to 1.53.
US & Global Market Summary
US Market: 8/24/20 - 8/28/20
Normalized Factor Returns: Axioma Worldwide Equity Risk Model (AXWW4-MH)
Please don’t hesitate to reach out if you’d like to better understand your own portfolio’s relationship to Volatility or any other factors.