How The Risk Monitor Revealed Market Stress

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Published on January 17, 2019

| 4 min read

Valerie Azuelos, Managing Director, Client Portfolio Manager


Last year was one to remember.

The U.S. equity markets opened – and closed – 2018 with a sharp rise in volatility that pushed the S&P 500 Index into correction territory three times and came close to dropping by 20% on Christmas Eve.

A year ago we launched the Intech Equity Market Stress Monitor™, a collection of five risk metrics that measure the deviation from normal levels, any extreme is typically taken as a sign and warning that a return to the norm may shock the market and be a source of volatility. As traditional measures of volatility were demonstrating historical low levels, our risk indicators were showing extreme readings and a clear sign of strain in the market to come.

Sure enough, in 2018 all three major U.S. indexes, the S&P 500, Dow Jones Industrial Average and the Nasdaq Composite, closed negative for the first time since 2008, while the S&P 500 hit its worst December since 1931. The number of daily return swings greater than 1% grew to 64 in 2018 from 8 in 2017 as measured on the S&P 500 Index.

Last year the Intech Equity Market Stress Monitor™ shed light on two indicators in particular: capital concentration and skewness of returns.

While capital concentration increased over the first three quarters in the U.S. driven by a few larger-cap growth stocks, it decreased in other developed markets. In fact, we’ve never observed this level of divergence in capital concentration based on data going back to 1992, as explained in our Equity Market Observations video by Senior Managing Director, Richard Yasenchak.

Skewness of returns, an indirect measure of investors’ confidence and exuberance levels, also showed a clear divergence in trend between the U.S. and rest of the world in 2018. The U.S. market exhibited a notable shift from extreme high levels to median levels towards the end of the year indicating that returns in the U.S. were showing a more balanced distribution and investors weren’t overly-optimistic.

On the other hand, we saw an increase in the skewness of returns in the non-U.S. developed markets as measured on the MSCI EAFE Index. This difference in trends reflects an uncommon divergence in market sentiment.

As we start 2019, the risk metrics tracked by the Intech Equity Market Stress Monitor™ continue to exhibit signs of stress across many equity markets, albeit less extreme than a year ago in U.S. and global equity market indexes. Yet, the greatest stress is currently observed in European and Emerging Markets equity indexes.

Intech has been studying the market stability for decades. Rather than rely solely on backward-facing measures, such as standard deviation, investors can monitor market stability, or lack thereof, by noting where an index’s risk sits relative to its historic ranges. Any extreme across a collection of risk metrics and indexes should be taken as a sign of warning that a return to the norm may shock the market and be a source of volatility.

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


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