Listen to our latest Intech® Equity Market Observations Watch Now

For U.S. and Canadian Institutional Investors Only

Information contained in this area of the Website is published solely for general informative purposes and intended only for United States and Canadian institutional investors, consultants, financial advisers, and other intermediaries who are who are knowledgeable and experienced in the financial services market and in investment products of this nature. If you are a retail, individual investor or non-ultra-high net worth individual then please leave this website immediately. The information is not authorized for use in a jurisdiction where distribution is not authorized and is not intended for distribution to retail clients, the general public or retail investors. If you choose to access this Website from locations outside of the United States or Canada, you do so at your own initiative and risk, and are responsible for compliance with all applicable laws.

U.S. Institutional Investors: By accessing this site you confirm that you are an U.S. Institutional Investor, you agree not to forward or make the contents of this site available to any person who is not an U.S. Institutional Investor, and you agree to be subject to intechinvestments.com terms of use.

Canadian Institutional Investors: By accessing this site you confirm that you are a “permitted client” as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations of the Canadian Securities Administrators, you agree not to forward or make the contents of this site available to any person who is not a “permitted client”, and you agree to be subject to intechinvestments.com terms of use. The information on this Website is for informational purposes only and does not constitute (i) an offer for products or services or (ii) the provision of investment advice of any kind, tailored or otherwise. The information on this Website should also not be construed as an offer to sell or a solicitation of an offer to buy to any persons who are prohibited from receiving such information under the laws applicable to their place of citizenship, domicile or residence. Intech Investment Management LLC (“Intech”) does not have any funds that offer securities under a simplified prospectus for general offer or sale within Canada. No securities regulatory authority in Canada has reviewed or in any way passed upon this website or the merits of any investment available, and any representation to the contrary is an offense. Intech is registered with the United States Securities & Exchange Commission under the Investment Advisers Act of 1940. Intech is a subsidiary of Janus Henderson Group plc, and is affiliated with its subsidiaries and affiliates.


Redirect Me to JanusHenderson.com

The Intech Equity Market Stress Monitor™ saw modest improvements last quarter, but extreme conditions signal more volatility to come.

Key takeaways:

  • Most major market indexes are still showing signs of instability, according to the July 2018 Intech® report.
  • European equity markets exhibit the strongest stress signals, although global developed markets as a whole are relatively stable.  
  • Volatility will probably persist, but the likelihood of a major market correction is moderately less likely than it was at the start of the year.

What a difference a year makes. In 2017, the Standard & Poor’s 500 saw just eight trading days in which returns fluctuated by 1%. During the second quarter of this year, the index experienced more than a dozen such swings, with the month of April alone serving up more daily volatility than all of last year. 

Instability continues to be the overriding theme for equity markets around the world. Based on the Intech Equity Market Stress Monitor, investors should figure for more of the same as we move through the second half of the year and into the next.

Intech® has been studying the relationship between risk and market stability for decades by tracking five primary metrics – capital concentration, correlation of returns, dispersion of returns, index efficiency and skewness of returns. When these indicators have a percentile rank of 40% to 60%, it suggests that markets are stable. When they teeter to the extreme, whether higher than 80% or lower than 20%, it signals stress.

As was the case in the first quarter, most major global indexes are sitting on the extreme ends of their historical norms. That said, volatility can serve as a pressure relief valve for markets, and the second quarter did offer some improvements.

Going into the second quarter, the S&P 500 was flashing red on four out of five risk metrics. As of the end of June, just three of those indicators sat far outside of their historical norms.

Most notably, the second quarter saw a shift in skewness of returns. Previously near historical highs for bullishness, this signal moved closer to its normal range for all but one major index, the MSCI Europe. In other words, investors are reacting more appropriately to bearish news, rather than being blindly optimistic.

Figure 1: Skewness of Returns

EMSM_2Q18_legend

EMSM_2Q18_Skewness

 

Capital concentration, which measures how capital is distributed among stocks in an index, is still extreme for some markets. In the second quarter, more capital was allocated to smaller-cap stocks in the MSCI EAFE and MSCI Europe, while investors favored mega-cap stocks in the MSCI Emerging Markets.

Overall market concentration in the S&P 500 is not yet at extreme values, but some concentration was evident within the energy, technology and consumer discretionary sectors. In the second quarter alone, 82% of energy stocks outperformed, Amazon shares increased 17% and Facebook stock surged 22%, versus 3.4% for the index overall.

Figure 2: Capital Concentration

EMSM_2Q18_Capital

 

Correlation of returns – the extent to which index constituents move together – suggests that idiosyncratic risk remains high in most markets. Europe was a notable exception for the second quarter. Although its equity markets remain under stress, it did see some normalization in this metric, moving from the extreme left and closer to center.

Figure 3: Correlation of Returns

EMSM_2Q18_Correlation

 

Dispersion of returns for all five indexes remains unusually low, with stock returns relative to their respective benchmarks still converging. So while active managers have a better shot spotting winners and losers, thanks to low correlations, they need to take incrementally more risk to achieve excess returns. This has been particularly true for growth stocks.

Figure 4: Dispersion of Returns

EMSM_2Q18_Dispersion

 

Index efficiency saw a slight improvement in the second quarter. Nevertheless, it is at the extreme end for most major indexes – an indication that managers need to take more beta risk to beat the market. This proprietary indicator looks at how much beta (market exposure) is required to construct an efficient portfolio (outperforming the index with less risk) by owning a selection of index constituents.

Figure 5: Index Efficiency

EMSM_2Q18_Index 

Signs of Stress Outside the U.S.

While the second quarter brought some balance back to U.S. markets, European equity markets remained under stress, with four out of five major signals at the extreme ends of their historic norms.

Global developed markets as a whole, however, are sitting on relatively stable ground. The MSCI World Index had just two risk measures – dispersion and index efficiency – on the far ends of the scale.

Emerging markets were mixed. On the one hand, correlation of returns, dispersion of returns and index efficiency inched toward the middle; capital concentration and skewness of returns moved to the extreme.

In summary, the world’s major equity markets aren’t out of the danger zone. The Intech Equity Market Stress Monitor™ suggests more price swings to come for the foreseeable future. That said, with the return of volatility, some measures of stability have improved. For investors, that means that the likelihood of an extreme market event has subsided since the beginning of the year.

Learn about the other indicators of strain in the market and how to use the monitor in your everyday work by downloading the eBook and quarterly report below.

Intech Equity Market Stress MonitorTM  Download the eBook that serves as a guide to our monitor. Download Now

The views presented are for general informational purposes only and are not intended as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service, or fund nor do they purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. This information should not be used as the sole basis for investment decisions. All content is presented by the date(s) published or indicated only, and may be superseded by subsequent market events or other conditions. Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal and fluctuation of value.