The markets’ new confidence

After the Fed’s recent 25 basis point rate cut, U.S. equities surged to all-time highs. Economic resilience and monetary easing seem to be driving markets to embrace risk again. But how well has that risk translated into returns? Let’s look at a few different investment styles to see how they’ve fared lately. 

Style factors such as value, size, momentum, and volatility are traits of individual stocks that help explain their performance. Equity investors use these to build portfolios targeting specific behaviors.   

The chart below shows how some of these factors performed on an absolute basis both year to date and over the past month. These strategies operate by ranking stocks by a factor (such as momentum), going long the cheapest 20% and short the most expensive 20%, essentially measuring how well the best-performing stocks in each category did versus the worst. 

We have ranked the factors below on a year to date return basis. As can be seen by the spread of returns:

•  Momentum and size strategies had strong absolute returns.
• Growth and liquidity strategies were modestly positive.
• Quality, value, and low volatility strategies significantly underperformed.

This suggests that riskier strategies have been rewarded recently, while defensive ones lagged. While past performance is no guarantee of future results, this spread of returns aligns with current macro conditions. 

GDP growth remains solid, with Q3 estimates near 3.3%. Unemployment is low at 4.3%, and core PCE is stabilizing around 2.9%. Credit markets show no signs of stress, and consumer spending remains strong, as evidenced by August’s retail sales beating expectations for the third consecutive month. 

With the Fed entering a rate-cutting cycle and economic fundamentals holding firm, an overweight to U.S. equities and risk assets appears well supported. 

Maverick Lin contributed to this article. All data sourced from Bloomberg.