A Volatile Quarter Underscores Stress

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Published on October 15, 2019

| 4 min read

Valerie Azuelos, Managing Director, Client Portfolio Manager


Looking at last quarter’s dynamic in U.S. equity markets you would be hard pressed to believe that the S&P 500 Index reached its biggest year-to-date gain since 1997.

The S&P 500 posted 11 moves of more than 1% in 22 trading sessions in August. Despite that, global indexes posted mixed returns partly masking the whiplash equity markets experienced that month. Those moves included three declines of at least 2.6%.


YTD Equity Market Returns_2019-09-30

Recent rise in market volatility has been propelled by various factors that include U.S.-China trade uncertainty, tensions in U.S. politics and recession concerns. Extreme movements of the Intech Equity Market Stress Monitor® continue to suggest caution in both developed and emerging markets through its various metrics.

Index Efficiency

The index efficiency risk metric in the Intech Equity Market Stress Monitor continued to decline this quarter in most major developed markets and is reaching close to historical low levels in the U.S.

A lower index efficiency offers investors the potential to improve diversification with less beta exposure. Defensive equity strategies, which seek to reduce beta exposure and significantly lower volatility, generally outperformed their equivalent cap-weighted benchmark this quarter.




Correlation of Returns

Correlation of returns risk metric continued its trend upward, suggesting an increase in systematic risk. This means that beta is beginning to have a larger influence on stock returns.

A rise in correlation of returns also reflect the risk of potential “groupthink” across equity markets and may suggest a heightened potential for further volatility.




Skewness of Returns

The skewness of returns risk metric trended lower this quarter, reflecting a less bullish sentiment in the market. Looking at the S&P 500 Index, the skewness of returns metric is now below its median level for the first time since 2014.




European equity markets appear to be immune to the shift in investors’ sentiment for now as illustrated by the skewness of returns metric, which continues to be near historical high levels. Yet, the stretched levels and rapid changes observed on other metrics point to signs of stress in that region.

Other Indexes and Regions

In Non-U.S. developed equity markets, capital concentration and dispersion of returns continue to remain within the lower tails when compared to all historical observations, reflecting a continued and heightened risk of concentration in smaller names and convergence amongst non-U.S. stock relative returns, respectively.

Emerging markets continue to demonstrate more strain than developed markets with four of five indicators at extreme levels. If these indicators dramatically return to typical levels, there’s a potential for more volatility along the way.

After two quarters of some normalization in U.S. equity markets, all of our risk measures moved further away from their typical levels during the quarter, and suggest potential instability in the S&P 500 and other U.S. indexes.

Learn more by watching this two-minute video on Intech’s equity market observations for the quarter.


Watch our latest Equity Market Observations video A quick take on the equity markets from the Intech perspective. Watch Now


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