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October saw US equities rally on speculation the Fed might change tack

November 2, 2022

The FT Wilshire 5000 rallies 8.2% in October

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Having fallen sharply over the prior four-week period the FT Wilshire 5000 started to inflect sharply higher from mid-October closing out the month with a +8.2% return. There were two principal catalysts behind the recovery in risk appetite. The first was the market registered as significantly oversold in mid -October, reaching levels that typically see a subsequent rebound. The second catalyst was speculation that the Federal Reserve was becoming increasingly concerned about tightening too aggressively given mounting recession headwinds.

Exhibit 1: A robust recovery in the latter half of October

Source: Wilshire. Data as of October 31, 2022.

October saw a continued preference for Value vs Growth style


A key attribute of the recovery in risk appetite was the notable preference for Value over Growth as measured by the FT Wilshire 5000 style indexes. In October the Large Cap Value style index delivered a return of 11.6% while the Large Cap Growth style index only appreciated 4.2%. This rotation has been a dominant theme through the course of 2022 with Value outperforming Growth by 21.3% year to date.

Exhibit 2: A continuation of the sustained preference of Value vs Growth in 2022

Source: Wilshire. Data as of October 31, 2022

Financials and Energy sectors delivered the largest performance contributions

Dissecting market returns using sector weighted contributions ( the combined impact of sector performance and sector weighting) October saw the largest positive contribution from Financials followed by energy. Real estate and transportation sectors delivered the lowest contributions.

Exhibit 3: October performance driven by Financials and Energy

Source: Wilshire. Data as of October 31, 2022


The Year-to-Date drawdown of-24.9% is the sixth largest in 40 years

The YTD drawdown of-24.9% as of 30th is now the sixth largest witnessed over the last 40 years as shown in Exhibit 3.

Exhibit 4: Putting the YTD drawdown into perspective

 Source: Wilshire and Refinitiv. Data as of October 31, 2022


Differentiating bear market rallies vs meaningful inflection points

November 2, 2022

Bear markets are not linear – they typically witness numerous rallies

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From January 3rd to the recent low on October 14, the the FT Wilshire 5000 had registered a drawdown of -25.9% the sixth largest since 1980. The key observation about bear markets is that they are not linear – in fact they often move in a sawtooth manner marked by numerous bear market rallies. This has been observable in the trajectory of the FT Wilshire 5000 returns this year (see chart below). Bear market rallies reward the ‘sell the bounce’ discipline, the antithesis of ‘buy the dip’.

Exhibit 1: Bear markets typically see numerous tradeable rallies

Source: Wilshire and Refinitiv. Data as of October 31, 2022

Just under half the days in a bear market register positive returns

To reiterate the point that bear markets are not linear we have measured the trading pattern of bear markets (lasting more than three months) registered by the FT Wilshire 5000 since 1980. This shows that around 45% of the trading days witness upward moves. The bear market is driven by the compounding effect of the average daily move in a down day being -1.4% vs the average daily move on an up day being +1%.

Exhibit 2: The trading pattern of bear markets

Source: Wilshire and Refinitiv. Data as of October 31, 2022

How to differentiate a bear market rally from a sustained inflection point?

If bear markets witness numerous bear market rallies, how can we identify when a rally is marking a nadir followed by a sustained positive move?

One answer to this is to wait for key technical signal confirmation. The ‘Golden Cross’ (the positive intersect of the 50-day moving average with the 200-day moving average where the latter has bottomed) is a useful tool aiding the identification of major market inflection points.

Exhibit 3: The ‘Golden Cross’ helps identify key inflection points

Source: Wilshire and Refinitiv. Data as of October 31, 2022

Q3 witnessed a dramatic "U-turn" in risk appetite

October 3, 2022

The rapid reversal in risk appetite in Q3 has produced a retest of the June lows

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August witnessed a significant reversal in risk appetite mid-month in response to a succession of hawkish Fed guidance. This brought an end to the +18.6% two-month rally (and optimism) that started on June 16 and peaked on August 16. Since the mid-August peak, the FT Wilshire declined -16.7% over the remainder of the quarter to produce a -4.4% return for the three-month period. The strength of the rotation to risk aversion has now driven the index below the low point reached in mid-June.

Exhibit 1: A rapid reversal in returns over the last six weeks of Q3

One of the largest six-week drawdowns since 2006

Exhibit 2 puts the scale of the drawdown in US equities over the latter half of Q3 into perspective - showing that it is almost a three standard deviation event. Outside of the GFC and COVID sell offs, this is one of the largest six-week drawdowns since 2006.

Exhibit 2: Putting the six-week drawdown into perspective

The YTD drawdown of -24.9% is the sixth largest in 40 years

The YTD drawdown of -24.9% as of Sept. 30 is now the sixth largest witnessed over the last 40 years as shown in exhibit 3.

Exhibit 3: Putting the YTD drawdown into perspective

Index no. 15738341

The surge in the dollar is creating market distortions

October 3, 2022

A key feature of 2022 has been the sustained strength of the US dollar

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2022 has seen persistent strength in the US dollar aided by positive interest rate differentials, haven status and the perception the US is less exposed to the Ukraine invasion energy shock. Exhibit 1 shows the long-term performance of the DXY dollar index and the 16.8% YTD return has pushed the dollar back to levels not seen since the turn of the century.

Exhibit 1: The dollar is back to levels last seen over 20 years ago

The quantum of the appreciation of the dollar accentuates regional equity return differences

FX swings can have a large impact on unhedged regional equity returns depending on the location of investors. Due to GBP, Euro and JPY weakness, investors in the UK, Europe and Japan have a very different perception of regional market returns based in GBP, Euro and JPY versus the returns seen by a US dollar-based investor over both Q3 and YTD periods. For instance, it can be seen in exhibit 2 that UK unhedged investors (courtesy of the 8.2% decline in the pound) saw a positive return from US equities in Q3.

Exhibit 2: Comparing UK and US (unhedged) equity return profiles for Q3

The strength of the dollar is mitigating the impact of declining commodity prices

Most commodity prices are denominated in dollars. Consequently, when the dollar appreciates it offsets the impact of any fall in prices to non - US dollar-based participants (and vice versa). For instance, exhibit 3 shows that although the oil price declined 22% in Q3 in dollar terms, due to the depreciation of sterling, euro, and the yen against the dollar the oil price drop denominated in those currencies is more muted. The distortion of the move in the dollar on the regional oil price is even more extreme looking at two-year data.

Exhibit 3: The impact of the dollar on regional oil price moves

Index no. 15738341

August was a month of two halves for FT Wilshire 5000 return delivery

September 6, 2022

Hawkish Fed guidance sends FT Wilshire 5000 into reverse gear in August

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August witnessed a significant reversal in risk appetite mid-month in response to a succession of hawkish Fed guidance. This bought an end to the +18.6% two-month rally that started on June 16 and peaked on Aug. 16. Since the mid-month peak, the FT Wilshire has declined -8.1%, producing a -3.8% move for the month of August.

Exhibit 1: August brought an end to the two-month rally  


August saw a rotation back to small cap and value stocks

The mid-August reversal also produced a rotation in style performance. The table below shows that most of the underperformance of large cap relative to small cap in August was attributable to the larger negative contributions from the financials, digital info and services, health care and technology sectors.

Exhibit 2: Four sector-weighted contributions account for small cap outperformance

Rising bond yields cause growth to lose momentum vs value

Rising bond yields impacted the highly valued long duration growth stocks in August and this resulted in the growth style (with its large exposure to the technology and digital information sectors) losing momentum relative to value as the month progressed.

Exhibit 3: Two sector weighted contributions account for growth underperformance

Still a way to go before the growth vs value trade reverts to 2016/17 levels

Exhibit 4 puts the growth vs value rotation into a longer perspective. Despite the scale of value outperformance so far this year, the relative trade still has a long way to go in order for it to mean revert back to 2016/17 levels (parity levels).

Exhibit 4: The long term perspective on Growth v Value relative performance

15585188 E1122

The FT Wilshire 5000 continues to deliver strong long term real returns

September 6, 2022

Equities are a long duration asset class and returns should be viewed via the prism of long-time horizons

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Although recent volatility and inflation angst have produced negative nominal and real returns for the FT Wilshire 5000 over the last 12 months, it is worth remembering that equities are a long duration asset class and returns should be viewed via the prism of long-time horizons.

The chart and table below show the progression of FT Wilshire returns over the last 20 years. Real annualized returns have exceeded 7% over the five-,10- and 20-year periods.

Exhibit 1: The aggregate and annualized nominal and real total returns for the FT Wilshire 5000

The nominal return profile of the FT Wilshire 5000 style indices

In Exhibit 2, over a 20-year period small cap's annualized returns of 10.8% have exceeded the 9.8% delivered from large cap. However, small cap's annualized returns have lagged large cap returns over three-, five- and 10-year time frames.

15585177 E1122

US equities significantly outperform other regions in July

August 4, 2022

The 9.6% return for US equities in July exceeded all other major equity regions

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While July saw a rally in most equity market regions (with the notable exception of China), the notable performance was delivered by US equities which outperformed the World ex US index by 5.8%.

Chart 1: Comparing regional equity returns in July (USD, TR, %)

Source: Refinitiv, FactSet

Looking at 10-year annualized returns US equities have delivered 13%, more than twice the 5.9% return from the World ex US.

Chart 2: Regional 10-year aggregate and annualized returns (USD, TR, %)

Source: Refinitiv, FactSet

July produced an inflection in relative performance characteristics

The rally in the US relative performance in July saw it rebound back to levels seen earlier this year. By contrast, Emerging Market relative performance weakened

Chart 3: Relative performance charts for the US and Emerging Markets

Source: Refinitiv, FactSet

Sector weighted performance contributions explain why the US outperformed

To identify the driver of US equity outperformance in July, it is useful to utilize sector weighted performance contribution analysis. Exhibit 4 compares the sector weighted contributions for the US and the World ex US indexes. The majority of the almost 6% outperformance of US equities in July was almost entirely due to the scale of contributions from the Technology and Consumer Discretionary sectors.

Chart 4: Sector weighted performance contributions US and World ex US for July

Source: Refinitiv, FactSet

Index 15303321 E0922

FT Wilshire 5000 delivers strongest monthly rally since November 2020

August 3, 2022

The 9.6% return in July was driven by a rotation to growth stocks

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July witnessed a strong recovery in the FT Wilshire 5000 index driven by a rally in growth stocks. Mounting concerns about recessionary headwinds boosted demand for long duration growth stocks by reducing discount rates (via lower nominal and real yields) and by increasing demand for their defensive attributes. The 9.6% rally in the FT Wilshire 5000 was the fifth largest monthly return in the last 20 years.

Chart 1: The fifth largest monthly return over the last 20 years

Source: Wilshire

Chart 2: Large-cap growth relative performance has responded to declining real yields

Source: Wilshire, FactSet

The Technology, Consumer Goods and Digital Info sectors drove Growth performance

Sector weighted performance contributions take account of both the performance and respective sector weightings. Comparing the sector weighted contributions for large-cap growth and large cap value in July, it can be seen that the majority of growth's 6.4% outperformance relative to value was due to the size of the respective contributions from the key growth sectors - Technology, Consumer Goods and Services and Digital Information.


Chart 3: The sector weighted contributions to July performance

Source: Wilshire

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FT Wilshire 5000 mid-year review: Perspectives on the correction

July 5, 2022

The first half of 2022 witnessed a significant correction to the FT Wilshire 5000 index taking the index back to levels last seen in early 2021

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A key feature of the sell off was the rotation out of long duration growth and tech stocks in response to rising real yields. It also produced a statistically significant decline in PE valuation.

Correction driven by stagflation and monetary policy angst

As at the close on June 30th 2022 the FT Wilshire 5000 index delivered a negative return of -20.9% for the first half of the year. Most of the negative return was delivered by the substantial Q2 correction of -16.8% as market sentiment reacted to mounting stagflation angst and increasingly hawkish Federal Reserve guidance.

Chart 1: The largest half year correction on record

Source: Wilshire, Refinitiv

Chart 2: The correction has rewound the index back to February 2021 levels:

Source: Wilshire, Refinitiv, FactSet

However, despite the pullback US equities have still delivered strong nominal and real long-term returns  measured on both an aggregate and annualized basis.

Chart 3: Strong long term Nominal and Real returns

Source: Wilshire, Refinitiv, FactSet

A key feature of the first half was the long duration (growth) stock sell-off

A significant element of the correction was driven by a rotation out of long duration growth and technology stocks as real yields increased

Chart 4: Rising Real Yields have led to Growth stock underperformance/Value stock performance

Source: Wilshire, Refinitiv, FactSet

The growth stock underperformance was dominated by the negative sector weighted performance contribution delivered by the Digital Information, Technology and Consumer Goods and Services sectors. Only the Energy sector posted a positive return contribution YTD.

Chart 5: FT Wilshire 500 Sector Weighted Performance Contributions YTD

Source: Wilshire

The correction has produced a significant and rapid PE decline - producing a rarely seen 3 standard deviation move.

Chart 6: A rapid and large decline in the PE valuation

Source: Refinitiv, FactSet

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