We examined our three ‘regions’: US, Europe and Emerging Markets to understand how factors performed in October 2020.
As the world awaited the US Presidential Election, we saw:
As shown in Figure 1, US equities took on a very different profile in October from earlier in the year. In fact, our Q3 Factor Performance Report made reference to the ‘familiar ring’ to the outperformance by both Growth and Momentum. This month, all Value sub-factors outperformed the market together with High Volatility and Small Cap Stocks. While October saw an overall market decline of about 2%, each of those Styles recovered about half of those losses. Because of the high overlap in names between Growth and Momentum, it’s no surprise that they performed similarly.
Figure 1: October 2020 US Factor Performance on a sector adjusted basis. Source: Style Analytics.
In late October, before seeing these results, we published a blog research analysis about how factors tend to behave after US Presidential Elections in which we pointed out that stimulatory policies by both new or re-elected Presidents alike lead to outperformance over the subsequent half year by Value, Small Cap and High Volatility. This is precisely the behavior we’ve already begun seeing throughout October.
In the half-year following seven of the past nine US Presidential Elections that pattern has played out, leading us to expect that the October picture may become the new norm for US markets.
Europe’s factor performance in October was quite muted: the market lost 5% but the largest factor movement was just 70 bps. The average factor movement, in absolute terms, was just 25 bps. It didn’t really matter which factors a portfolio overweighted as the overall loss dominated the month.
Figure 2: October 2020 European Factor Performance on a sector adjusted basis. Source: Style Analytics.
Interestingly, the research we performed about US Presidential Elections showed the same results for Europe: European stocks also showed significant outperformance amount Value, Small Cap and High Volatility following US Elections. In Europe, Growth also joined that group of outperformers for the half-year following US elections and again, it happened regardless of which party controlled the White House.
But we see no sign of that behavior in European markets according to Figure 2. History tells us that in seven of the past nine US Elections, European stocks should follow the pattern exhibited by the US this past October with the addition that Growth stocks do well in Europe.
Emerging Markets didn’t seem to get the memo that the Developed markets got to change factor profile, or to lose money for that matter. The only region to hold onto its upward trend, Emerging Markets, also posted a profile that somewhat resembled it’s September behavior: Value down, Growth up and Momentum up. Emerging markets also continued its usual behavior of consistency between sub-factors: all Value sub-factors were down and all Growth sub-factors were up. While this is not true for other investment Styles this month, the Value-Growth story is significant.
Figure 3: October 2020 Emerging Markets Factor performance, country and sector adjusted. Source: Style Analytics.
The global Growth up phenomenon of this year has also fueled Momentum, with a high overlap in names between those two investment Styles. October is no different, with strong outperformance by both.
Appendix: How to read the charts
Each factor’s performance is based on the relative performance of the top 50% (by market cap) of that specific factor compared to the overall market (the sole exception is the size factor which uses the top 70%). For example, for the first factor, book-to-price, we determine the period’s performance of the basket of stocks with the highest book-to-price values relative to the total market.
Each factor is analyzed independently, and market and fundamental data are adjusted so that sector-average (within each country) relative data is used and the performance measurement isolates the factor’s contribution to return. In Figure 1, stocks with a high book-to-price (i.e. high value stocks as measured by book-to-price) underperformed the broad market by 80 bps on a country and sector adjusted basis.