(Bloomberg) – Another tech plunge, another boost to stocks, contributed to Wall Street’s big comeback in a bad year.
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As the Federal Reserve ramped up its hawkish policy guidance this week on still raging inflation, the once-booming Faang megapcaps lost another $568 billion in market value, bringing the total capitalization group to its lowest level since mid-2020.
With rising interest rates abruptly ending Big Tech’s leadership, the biggest tech companies are wielding less and less power over broader indices, as former companies like Meta Platforms Inc. and Amazon.com Inc. crashed again in the most recent wave of sales. Reversing the extremes of the cheap money years, the capitalization-weighted S&P 500 hit its lowest level against the equally weighted version of the benchmark since 2019.
All of this is a boon for so-called factor investors, who analyze stocks according to their mathematical characteristics, from how cheap stocks are to how fast they are going up. These funds are typically lighter than tech megacaps and tend to expand their visibility, a favorable setup in this age of widely improved markets.
According to the Dow Jones Market Neutral Index, 11 of the last 13 sessions have lost more than 2%, strategies favored by factor funds such as value, quality, momentum, and low volatility. earn money.
“You have a much more diverse set of opportunities, allowing more factors to come into play,” said Sean Phayre, head of quantitative investing at Abrdn Investment Management. “Before 2019, 2020 was a very one-sided market.”
Managers who systematically deploy factor strategies in one form or another are on a winning streak. The AQR Stock Market Neutral Fund has bounced back since October to post a 21% gain so far this year. The Jupiter Merian Global Equity Absolute Return Fund, which has blown assets away during the tech boom, is up nearly 7%.
The math revolves around Wall Street crawling data to find patterns across the entire stock market. That means they primarily split their bets across a large number of securities. So when market returns are concentrated in a few megacaps, it’s almost by definition much less of a share of that stock than a cheap and cheerful S&P 500 tracker. Such was the case during the low interest years when the Faang block – – Facebook Inc., now known as Meta, Apple Inc., Amazon, Netflix Inc. and Alphabet, Google’s parent company – drive the bull market.
Now, a broader pool of winners is giving money managers more opportunities. In a reversal of pre-2021 trends, the S&P 500 rallied about 8% in October even as half of the Faangs fell.
Recently, the factor of momentum, a popular quantum trade, has also joined the group. A chameleon style of investing that is simply betting on the winners of the past year, it didn’t do well at turning points like early 2022. But after rebalancing into well-performing stocks such as healthcare and energy stocks, the strategy rallied this quarter. of persistent trends driven by fixed inflation.
The $12 billion iShares MSCI USA Momentum Factor ETF (ticker: MTUM) attracted a record $2 billion in inflows last month after its 13% gain beat the largest market in history. its nine-year history. A market-neutral version compiled by Bloomberg is on track for its best year since 2015.
Christopher Harvey, head of equity strategy at Wells Fargo, wrote in a note: “Momentum is an all-weather strategy. He expects more damage to the market from inflation and employment data, offering incentive strategies as “they tend to do well” in stressful conditions.
Meanwhile, 87% of highly motivated companies have surpassed earnings expectations this season, compared with 70% for the S&P 500, according to Harvey. These winners are also more rewarded for good results and less punished for bad names.
The value strategy of buying cheap stocks has also seen another bump with rising rates driving investors away from stocks with high multiples. Meanwhile, low-volatility trading is shining as more stable stocks like healthcare names win.
These trends have only recently intensified as US heavyweights like Amazon, Alphabet and Microsoft posted disappointing earnings – a huge turnaround from the unbridled optimism of technology in the era. low rate.
“A single dimension has driven those names to the point of over-profitability – that pattern has broken down somewhat,” says Phayre at Abrdn. “By 2021, 2022, there’s a perception that there’s going to be some form of payback for all the cheap money.”
–With support from Lu Wang.
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