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Is Volatility telling us something about how equity indices will fare this year?
Back in January, we highlighted how Value and Volatility began the year by reversing the trends experienced during 2022. Volatility spreads turned positive, while Value returns turned negative.
So, how have the factor trends progressed through the second quarter?
In the January post, we compared Value and Volatility returns over the first two weeks of 2023 to the first two weeks of previous years. Here, we update the analysis through the first half of 2023.
Source: S&P Global; Jackson Creek Investment Advisors
Through the first six months of 2023, the situation looks similar to the start of the year. We see that higher Volatility and less attractive Value continue to be the main drivers of index returns. MTM, Short-term momentum (STM), and Size (Capitalization) each have smaller spreads, relative to Value and Volatility, through June 30th.
Volatility is the clear leader among the five major factors we track. The Volatility spread in our large cap universe is +20% for the first six months of 2023. This is the second highest since 2000, only trailing the 50% spread in the first half of 2009.
The 2023 first half Value spread is the third lowest over the 24-year period (2020 & 2019 being the lowest). Stocks with the most attractive Value characteristics underperformed the least attractively ranked by 8.16%. This also provides a visual reminder of how poor Values returns were during the 2017-20 years.
The next chart shows the cumulative weekly returns for 2023. Volatility experienced some ups and downs while the remaining factors were relatively flat, particularly during the second quarter.
Source: S&P Global; Jackson Creek Investment Advisors
Lastly, we single out Volatility and show the full years with H1 2023.
Source: S&P Global; Jackson Creek Investment Advisors
As of June 30th, Volatility’s positive spread ranks among the top four years going back to 2000. 2009 led all years with a 95% spread, followed by 2020 with a 59% spread between the top and bottom ranked stocks on Volatility, and then 2003 at 26%.
Interestingly, each of those full years saw equity markets rebounding from prior negativity. The market trough from the Great Financial Crisis occurred in 2009. 2003 followed the crash stemming from the Internet Bubble. And, most recently, 2020 comprised the swift pandemic-driven decline and subsequent rebound.
So far in 2023, we have seen equities hold up and even rebound after negative 2022 returns. Does this mean we are setting up for a positive 2023 for the broad indices?
We’ll see.