October Volatility Leads to Market Rotation

Insights

October Volatility Leads to Market Rotation

QS RESEARCH GROUP

NOVEMBER 02, 2018

Volatility increased in US equity markets during October with the VIX up 72% in the first week and S&P 500 Total Return Index down -6.8%, realizing the worst one-month equity return since September 2011.
One of the longest US bull markets in history appears to be showing signs of fatigue as recent dynamics begin to resemble signs of the later stages of the market expansion.  The market has begun to reassess risk upon:

  • Transition from quantitative easing to tightening in the US as the Federal Reserve continues its pace of rate rises
  • The lack of resolution between the US and China weighing on earnings expectations, especially in the Technology, Materials and Industrials sector 
  • Rising costs, via increased workforce wages and material/commodity input costs 
  • Weakness in the housing and auto markets as sales of new homes in the US fell for the fourth straight month in a row in September (Source: Commerce Department, WSJ)

Despite these issues, the underlying economic fundamentals remain relatively strong and we continue to advocate for strategic equity exposure. However, the market is realizing a rotation in terms of style and sector as value, dividends and low volatility stocks have outperformed their growth counterparts which have seen the sharpest declines. This repricing of risk and return provides a reminder of the inherent fragility of a narrow, concentrated market.

US FACTOR PERFORMANCE OCTOBER 2018

US SECTOR PERFORMANCE OCTOBER 2018

As of 10/31/2018
Source: Bloomberg, Factor Performance sourced from MSCI USA Factor Indices, Sector Performance reflective of S&P 500 Index GICS Sector Classification.

After a decade led growth/momentum rally, investor portfolios have become overly reliant on consumer facing technology and growth-oriented stocks and under exposed to defensive, dividend paying and value-oriented stocks. These under-appreciated stocks can provide an important source of diversification especially during the later stages of the market cycle which is often accompanied by heightened volatility and more frequent market drawdowns
During this market rotation in October, the QS Low Volatility High Dividend Index has drawn down 80% less than the S&P 500 Index due to its allocation to defensive, dividend paying, value oriented companies. 

OCTOBER 2018 CUMULATIVE PERFORMANCE

Source: Bloomberg, NAV Total Return, Standard & Poors 500 Index (SPX), QS Low Volatility High Dividend Index (LVHDNR).

The QS Low Volatility High Dividend Index has realized significantly less volatility versus the S&P 500 Index over the respective Month-To-Date and Year-to-Date periods.

As of 10/31/2018
Source: Bloomberg, Standard & Poors 500 Index (SPX), QS Low Volatility High Dividend Index (LVHDNR). Annualized standard deviation calculated daily.

IMPORTANT INFORMATION
This material is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or QS Investors, LLC to enter into or arrange any type of transaction as a consequence of any information contained herein. QS Investors, LLC does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of QS Investors, LLC, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person.

The views expressed in this document constitute QS Investors’ judgment at the time of issue and are subject to change. Past performance or any prediction or forecast is not indicative of future results. Investments are subject to risks, including possible loss of principal amount invested.

QSCR: 18268 (November 2018)