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Are We Heading For More Volatility?

Our small cap Volatility factor is acting similarly to previous extreme times


All data in this post is from our small cap universe.


Earlier in the year, we commented on the sizeable return to Volatility. During the first two weeks of the year, the Decile 1 minus Decile 10 spread was over +12.0%. Now, with a quarter behind us, we are revisiting factor returns.


As of the end of March 2023, cumulative returns for our five key factors were largely flat relative to the start of the year. We show the first quarter of recent years as a comparison.


Factor returns for Momentum, Capitalization, Value and Volatility. 2019 to 2023

Source: S&P Global, Jackson Creek Investment Advisors


This year’s first quarter factor returns were also the most bunched together compared to recent years. Factor returns were not flat throughout the quarter, however. Particularly for Volatility.


Volatility ended the quarter down 0.40% from the end of 2022. Not a big difference. But the above chart shows the path was far from linear. After our January post indicating Volatility’s large positive return, it rose further and peaked in early February. The cumulative return declined from there.


Source: S&P Global, Jackson Creek Investment Advisors


Looking at the last few years, it seems as if Volatility’s start to 2023 was most like 2021. They both had a strong start only to subside later in the quarter. Instead of relying on the “eyeball” test, we did a simple correlation analysis to check. Surprisingly, the first quarter of 2023 was most correlated to 2020. This is indicated by the 0.64 correlation coefficient in the chart below. The first quarter of 2021 is a close second, though.


Source: S&P Global, Jackson Creek Investment Advisors


The last chart plots Volatility’s annual return since 2000. Obviously, previous returns have no influence on future returns, nor do current correlations. Volatility’s 2020 return was the highest in our small cap universe data history (back to 2000). The fact that Q1 2023 was correlated to the first quarter of 2020 does not imply the annual result will be similar. It is just an interesting exercise.


Source: S&P Global, Jackson Creek Investment Advisors


It is also not a good idea to think Volatility will even be positive in any given year. Except for 2003, 2009, and 2020, all years had a flat-to-negative Volatility spread. Meaning the highest Volatility stocks underperformed stocks with the least Volatility, on average. The most extreme positive and negative years are highlighted, along with 2019-2023 – two of which (2020 & 2022) are in the extreme ends of the spectrum.


Again, this is just to provide some insight to what has happened so far and provide historical comparisons to better understand the big picture.

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