Post Midterms: Quality Back in Demand
Last week, we looked at the bones of the recent market recovery through a factor lens. We concluded that, with Profitability underperforming relative to the rally in Market Sensitivity and Volatility, it was difficult to say that investors were truly coming back into the market vs. covering their shorts. Building on that note, we wanted to analyze how these factors have behaved over the news-filled past few days. Our chief takeaway is that Profitability is now also seeing strength, leaving us cautiously optimistic about the chances of a sustainable market rebound.
Since November 1, our US market factor (99% correlated with the S&P 500) is up 3.7% on a cumulative basis:
Taking a look at how factors have performed over the past week on a normalized basis, we can see that most factors that were trending below their historical mean have seen some form of recovery during that time:
Most notably, Volatility, Market Sensitivity, and Earnings Yield saw the biggest normalized gains, with Mid Cap assets not too far behind. Profitability, which performed well on a cumulative basis, saw normalized returns fall back towards the mean.
Let's dig in to MTD cumulative performance for today's key factors:
We've seen a muted beta rally, with Market Sensitivity gaining 44bps the day after the elections, but then coming back in the following day.
After the huge short covering rally at the end of October (+1.86% from 10/30-11/1), Volatility has been flat to down. Similar to beta, it benefited from a brief bid up the day after the midterms, but fell a bit more the day after. We'll keep an eye on this factor over the next week to see if the downward move begins to look like a trend.
For our purposes, Profitability = Quality, and we've seen this factor on the rise over the last couple days, which we hadn't seen during the initial short-covering rally that we'd observed in the previous two factors. The trend has been consistently positive on both sides of the elections, which is the signal we were looking for in our note last week.
With Market Sensitivity and Volatility largely flat to up after benefiting from the previous short covering rally and slight post-midterm election boost, and Profitability now on the rise, recent factor performance suggests that investors are now coming back into stocks that they like. Caveat: while we're not seeing a reversal in Market Sensitivity and Volatility, we're also not seeing a sustained contemporaneous rally for all three factors yet. This leads us to be sanguine, but wary, that we may be seeing the early formation of a rebound in the market.
We remain in an oversold factor market and will continue to monitor factor movements to see what further read throughs we can discover. If you'd like to better understand how we measure the relationships between factors, please don't hesitate to reach out.