When U.S. equity markets started to join the international sell-off this quarter, we saw a notable contrast in market dynamics: a broad based market reversal from momentum to value and defensive stocks. This was a sharp and abrupt reversal across market capitalizations and regions. Market volatility is rising.
Although it’s unclear if volatility is likely to persist into 2019, it’s important to have a suite of metrics for evaluating and understanding market stress. In this kind of environment, it’s necessary to not only use mainstream risk metrics that focus on past or implied levels of volatility, but also measurements that help highlight an increased likelihood of tail-risk events.
The Intech Equity Market Stress MonitorTM measures the deviation from normal levels of risk; any extreme should be taken as a sign that a return to the norm may shock the market and be a source of volatility.
Our interactive monitor is a collection of five metrics we believe are reliable indicators of equity market stress based on our 30-year history of studying volatility.
- Capital Concentration
- Correlation of Returns
- Dispersion of Returns
- Index Efficiency
- Skewness of Returns
Consistent with our descriptive approach to understanding markets, these metrics avoid financial and economic assumptions, including that investors are perfectly rational and efficient at all times or, conversely, that they exhibit universal and constant behavioral anomalies.
You can use the monitor to add insight to market risk regimes, contextualize beta risk management or to simply complement your conventional risk metrics.