Factormageddon 2018?

Taking a break from our usual focus on a specific factor this week, we'll be sharing our observations on the recent market sell-off from a factor point-of-view. The Nasdaq and Dow are off to their worst start to a fourth-quarter since 2008, and we’re seeing one of the steepest market declines in recent memory. While many pundits are blaming rising interest rates, industrial weakness, and looming trade conflicts, our models show that we can empirically assign a lot of the market's underperformance to an intensifying factor rotation across the well known 6 style factors.

Specifically, investors have been steadily dumping stocks with exposure to Volatility, Momentum, andMarket Sensitivity (Beta), while rotating into Value, Size, and Profitability (Quality). On a broader level, it’s been an accelerating flight to (relative) safety in an increasingly risky, overbought market. While some are blaming the Tech sector for the market weakness, we're seeing similar trends within Tech, which gives us confidence in our perception that much of the market's movement has been style factor-driven.

It's important to note that this market selloff is dissimilar from the one we saw in Jan/Feb 2018, because there wasn't any meaningful factor rotation occurring at that point. The current period is actually much more reminiscent of the market drawdown of Q1 2016, the one that Goldman coined “Factormageddon.” Back then, Momentum and Volatility factors plummeted while Quality and Dividend Yield rallied.

Here's a closer look at each of the major factors at the heart of this rotation:

Large Cap Rally - Size is up 2.36% in the past 30 days across all sectors

Quality is up 1.51% - Led by selloff in Healthcare

Value is up 0.77% - Led by Financials, Oil & Gas, Metals & Mining

High Beta Names - Heavily correlated to small cap underperformance

Volatility - Down 1.89% in the past month across all sectors

Momentum is down 1.57%, also driven by the Software and Internet sectors

Here’s a look at the sector factors behind this sector rotation:

Sectors showing the biggest outflows include Automotive, Building, Household Durables, and Semiconductors. Sectors that have benefited from the rotation include Energy, Oil & Gas, Telecom, Marine, Utilities, and Metals & Mining.

We will continue to keep you apprised of the state of the market in the coming weeks from our quantitative point of view. If you'd like to further discuss how you can observe these trends in your portfolio and devise strategies to safeguard it during this potentially turbulent time, please don’t hesitate to reach out to us.

Regards,
Omer