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Index & Factor Returns - What Drove the Market Lower
The large cap Russell 1000 declined 19% and the small cap Russell 2000 declined 20%. It's no surprise that 2022 was not a good year for equity returns. Inflation, and the Fed's rate hiking to tame it, were the major drivers of stock declines.
From a factor perspective, there were a couple of large moves. Below is a table of five major factors we track. These are the same factors highlighted each Monday in our Weekly Factor blog.
Large Cap | Mid Cap | Small Cap | |
|---|---|---|---|
Russell Index | -19.3% | -17.3% | -20.4% |
MTM | 11.4% | 13.5% | 17.6% |
STM | -3.3% | 2.5% | -2.8% |
Size | 8.8% | 6.5% | 17.4% |
Value | 43.8% | 48.0% | 39.3% |
Volatility | -36.0% | -37.0% | -42.3% |
While the broad indices struggled for most of the year, our Value factor (Decile 1 minus Decile 10) performed very well. Within our large cap universe, Value had the best year since 2001. Within our mid cap universe, it was the best since 2000. The Value spread in the small cap universe is actually down from last year's 57.3%, but still ranks among the top five years dating back to 2000.
Value has a positive expected annual return so positive D1-D10 spreads are not uncommon, but 2022 was particularly high. The Value spread in the large and mid cap indices each were greater than 1.5 standard deviations above the annual average. It was only a half standard deviation above the yearly average in the small cap universe.
Conversely, Volatility returns were some of the most negative we have seen in our 23-year data history. In the large cap universe, Volatility's 2022 return was the most negative. It was the second lowest within the mid and small cap universes. Only 2000 was more negative for those capitalization ranges.
Volatility has a negative expected annual return so negative D1-D10 spreads are not uncommon, but 2022 was particularly low. The Volatility spread was greater than a standard deviation below its annual average in each market cap range.
Highly positive Value returns coupled with large negative Volatility returns are also not out of the ordinary. On an annualized basis, the factors have a negative correlation.
Medium-term Momentum (MTM) had an above average year but was not extraordinary. Short-term Momentum (STM) was generally in-line with its annual average return.
Size (Market Cap), which is more influential in the large cap universe and less so in the mid and small universes, was also within a normal average range.
As domestic equity markets digested ongoing inflation data - plus numerous other data points - investors shifted away from higher Volatility and towards Value in 2022.