Factor Rotations on Hyperdrive: What will surface?
Vaccine news took center stage yesterday, causing a monumental explosion in Value outperformance over Growth. While headline equity index performance is positive in November, some troubling cross currents are bubbling under the surface.
This cannot end well
Obviously what spurred on such movement is the vaccine news from Pfizer. Hopefully one day in the not so distant future we will be able to attend amusement parks, live music concerts and ride on budget European airlines. Gone will be the days of virtual meetings, events and occasions, no more need for that expensive exercise bike with a video screen. Time to party in real-time!
Stock prices focus on the future, with operation warp speed bringing a vaccine, investors are already pricing in a post covid future.
One can only imagine what will surface when the dust settles on this factor rotation
According to Goldman Sachs, Fundamental Equity Long/Short exposure to momentum was in the 98th percentile on a rolling 5-year basis. Yesterday Goldman's market neutral momentum index fell by seven standard deviations at 23%, the largest 1-day crash on record. Given the move, Goldman projects "Alphas" were crushed (it is good you cannot pay bills, or buy lunch with alphas).
Alphas crushed
While the fundamental discretionary Equity Long/Short space could hit challenges, we fear Systematic strategies, especially those who still take on traditional factor risks, are the ones who will suffer, and who could consequently de-lever, which would bring on a fresh round of pain for long/short participants of every style. Goldman estimates Systematic strategies suffered their worst 1-day performance and 1-day alpha since March.
The biggest move since 2001 for IWM vs QQQs