Will the Risk On Party Continue? | Chris Carrano on The Quantitative Factors Driving Markets
Jan 19, 2025
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Chris Carrano, VP of Strategic Research at Venn by Two Sigma, dives into the world of quantitative market analysis. He discusses how investors can better understand market dynamics through style factors, breaking down key events like the post-Trump Rally and December's market wobble. Carrano highlights the surprising underperformance of small-cap stocks compared to larger equities in 2024, and uncovers how momentum, especially influenced by tech companies, remains a driving force even amidst rising interest rates.
Quantitative measures like style factors are vital for investors to discern true market drivers from noise and enhance decision-making.
The mixed performance of factors in 2024, particularly the contrasting trajectories of small caps and value stocks, emphasizes the need for granular analysis.
Interest rates significantly influence market performance and require nuanced measurements to understand shifting equity risk exposure and portfolio implications.
Deep dives
Understanding Factors in Investment Analysis
Factors, such as value and momentum, are essential concepts in investment analysis as they help categorize the different drivers of risk and return in a portfolio. These factors allow institutional clients to apply a common language for evaluating diverse asset classes, making it easier to manage multi-asset portfolios effectively. The conversation likens factors to nutritional labels, providing a fundamental insight into how various aspects of investment contribute to overall portfolio health. By using factors, investors can better understand their exposure to elements like economic growth or interest rates, leading to more informed decision-making.
Performance Insights for 2024
The year 2024 saw a mixed performance across various factors, with small caps experiencing their worst performance since 1998, despite the broader market showing positive results. The analysis indicated that while the Russell 2000 index had an overall gain, the unique return attributed to its small cap factor was negative, reflecting the underlying complexities of factor exposure. Value stocks showed a surprisingly positive performance, despite initial assumptions suggesting they may struggle under prevailing market conditions. These nuances highlight the importance of granular analysis through a factors lens to understand individual performance drivers.
The Impact of Interest Rates
Interest rates played a significant role in shaping market performance throughout 2024. Although bonds saw a modest positive return, the overall interest rate factor was negative due to not being able to surpass the risk-free rate, underscoring the need for nuanced measurement in bond investments. The conversation emphasized the correlation between equity risk and interest rates, which typically inform expectations about equity market performance. As rates fluctuated, the factor analysis provided insights into how risk exposure may have shifted and the implications for portfolio management.
Behavior of Momentum and Trend Following Strategies
In 2024, the momentum factor captured significant market trends, benefiting from strong performances in tech and crypto-related stocks. However, the trend-following strategy exhibited disappointing results, signaling a divergence in how these strategies capitalize on market movements. The essential distinction is that while momentum focuses on relative performance among assets, trend following analyzes trends based on historical performance, affecting its overall adaptability to changing market conditions. This distinction proved crucial in understanding why momentum thrived while trend-following struggled in a volatile landscape.
Navigating Private Equity and Factor Analysis
Private equity remains a challenging investment sphere due to its periodic valuations and inherent illiquidity, but innovative methodologies can bring clarity to its analysis. The Venn platform seeks to 'de-smooth' private equity returns by integrating data from public proxies to establish a more accurate risk exposure profile. Through de-smoothing, interpolation, and extrapolation, private equity returns are rendered more comparable to public market returns, allowing for improved risk assessments. Ultimately, this approach aids institutional investors in making better allocation decisions regarding their broader multi-asset portfolios.
There are always many narratives about what drives markets higher or lower but increasingly investors are turning to quantitative measures like style factors to decouple the signal from the noise and pinpoint what is actually behind major market moves. In this interview, Chris Carrano VP of Strategic Research at Venn by Two Sigma breaks down the orthogonal market factors that drove asset prices in 2024 and what is driving them so far in 2025. He also examines key moments like the post Trump rally in November, December’s equity market wobble post FOMC, and the recent reaction to cooling CPI data. Filmed on January 17, 2025.
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