Comparing Factor Performance in a Global vs. US Model

Typically, the factor trends that we observe in Factor Spotlight are based on our US model. This week, we'll be introducing our worldwide model by taking a look at how some of the major factors have behaved on the global level, compared to what we're seeing in the US.

Before we jump in, here is a quick rundown of factor trends we've seen over the past week in the US model.

US Market

A fairly quiet week in the market was punctuated by some weakness on Wednesday, followed by a brief rally on Friday morning stemming from improved economic data out of China. A couple of economic datapoints then served to temper investor optimism, with US personal spending falling to its weakest since Sept 2009, personal income falling for the first time in three years, consumer sentiment falling short, and the ISM manufacturing index sliding to a two-year low.

‍US Market: 2/22/19 - 2/28/19

Here's an update on how some key factors have changed in the US model over the past week, using our normalized return indicator:

• Profitability continued to fall at an alarming pace and was the biggest loser on a normalized basis this week
• Market Sensitivity (Beta) is still falling from its historically significant overbought levels
• Volatility, which had been drifting downwards over the past few weeks, has started to flatten out
• Momentum appears to be bouncing back from a trough of -1.68 SD below the mean, while Earnings Yield and Size remained flat

Global vs. US Factor Movement

‍With international trade driving much of recent market action, it only makes sense to widen our scope and analyze how some of the major factors have performed at the global level, rather than just the US. Below, we'll be taking a look at how Momentum, Value, Growth, Volatility, and Beta have performed in both the worldwide and US models. Today we'll focus on the trailing 6 months, which spans the period of market volatility that started in early October 2018.

‍Medium-Term Momentum

While Momentum shared a similar ultimate trajectory in both models, the factor saw a bigger rally in the US towards the end of the year, and then a more precipitous drop in January. On a normalized basis, Momentum is being flagged as oversold in the US at -1.47 SD below the mean, while slowly heading into oversold territory in the global model.

Market Sensitivity

Here, we see that the performance of Beta (both cumulative and normalized) has trended very similarly in both models with hardly any deviance between the charts. In the US, Beta is being flagged as Extremely Overbought at +2.25 SD above the mean, while normalized return for the factor has recently shifted downwards in both models.

Volatility

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Again, we see very similar trends for Volatility between the two models, although the factor is down much more in the US (-4.64% vs. -1.9%). Normalized return had peaked towards the end of Jan / early Feb, but has cooled off and effectively stabilized in both the US and worldwide. In each model, there does appear to be room for more downside, as the factor is flagged as Overbought in both.

Value

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While Value has seen poor performance over the past 6 months, it has underperformed by ~2.48% in the US model on a cumulative basis. It appears that the rally in the factor at the beginning of 2019 was more profound at the global level, lifting the factor into positive territory for a while before seeing a pretty steep drop in Feb. Meanwhile, the US version of the factor reached a higher peak in the normalized index, almost reaching Overbought levels in early Feb before falling to Neutral territory today.

Growth

Returns for Growth saw some tangible differences between the two models, as the factor has seen positive cumulative performance in the US model, while it's down 70bps in the Worldwide model. At the same time, the factor is being flagged as Overbought on the global stage while it's Neutral in the US.

Conclusions

‍Because the US market is such a major component of the global market, it's not surprising to see key factor trends line up pretty closely between the two models. The most distinct difference between the two seems to be an increased appetite for growthy stocks in the US market over the past couple of months, although even that disparity is pretty muted when normalizing for historical return.

In the next few weeks we'll be doing more work in digging into factor movement in other countries and seeing what value we can derive from using an international lens for factor analysis.

Regards,
Omer