While unnerving, the late-February surge in global bond yields was a game-changer for equity market leadership, with important implications for navigating the road ahead.
Data since the Global Financial Crisis (GFC) demonstrates that the link between factors and economic cycles is broken—and in effect, the traditional “Investment Clock” framework for explaining factor behaviour is no longer applicable. If we look to evolve this thinking for the post-GFC period, we find in our recent paper that economic volatility regimes have a significant impact on factor payoffs.
When US equity markets reached the bottom one year ago at the onset of the pandemic, US microcap stocks were dealt a particularly sharp blow. They subsequently rebounded alongside all US equity market cap segments, but their performance continued to lag their larger size segment counterparts—until the events of early 2021 when US microcaps soared above the rest.
Major shifts in the macro backdrop, spurred by growing confidence in the post-pandemic recovery, could suggest the spectacular expansion in stock valuations of the past year may be poised for a reset. P/E mean-reversions can be painful or benign for stocks, but they also create new risks and opportunities.
10 Paternoster Square
Copyright © 1997–2020 IPE International Publishers Limited, Registered in England, Reg No. 3233596, VAT No. 685 1784 92. Registered Office: 1 Kentish Buildings, 125 Borough High Street, London SE1 1NP
Site powered by Webvision Cloud