Quants are getting lashed by some of the most violent stock swings in more than a decade as fears of a second virus outbreak fuel huge waves of selling on Wall Street.
With the Federal Reserve sounding the alarm on the long road to an economic recovery, systematic traders betting on reflation are getting crushed in the S&P’s biggest plunge since March’s mayhem.
The value factor versus momentum is on track for its third-worst performance since 2009 in Thursday trading. The popular investing style -- which scoops up cheap companies over recent market winners -- posted its biggest loss since the global financial crisis on Wednesday.
Investors are dialing back the optimism that turbo-charged stocks back toward records in the grip of the recession, while new American infections raise fresh fears about a once-in-a-century pandemic.
As the S&P 500 tumbles more than 5%, cyclicals from banks to energy producers are selling off by the most since March. All the whiplash is creating big allocation headaches for quants who dissect companies by their traits from how cheap they look to how much their share prices have rallied.
“Value is representative of a lot of beaten-up names,” said Sean Phayre, the global head of quantitative investments at Aberdeen Standard Investments. “It remains to be seen how much impact the unprecedented support from governments and central bank agencies will actually have.”
Another sign of whiplash on Wall Street: the size factor, which wagers on small caps, had its worst day since 2009 on Wednesday, after a volatile revival in recent weeks between stimulus cheers and pandemic fears.
Factors are now accounting for the highest portion of the S&P 500’s returns in about a decade, Evercore ISI’s analysis shows.
That’s a sign that active investors are likely struggling to make strategic calls on individual companies on the basis of traditional metrics like earnings. Instead Evercore’s analysis suggests factor exposures -- intended or otherwise -- appear to be driving large swings in portfolio returns. Macro risks are now driving 82% of factor volatility, the highest in about 10 years, it says.
All this is happening under the surface and hard to say for sure. But one thing is clear: The risk-on rotation in late May was almost as violent as the March madness, as optimism over economic re-openings drove investors to underperforming factors such as value and size.