Big Tech’s fall pushes quantitative stocks up on Wall Street


(Bloomberg) — Another tech plunge, another jab in the arm for stock market quants staging a comeback in Wall Street’s terrible year.

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As the Federal Reserve stepped up its hawkish policy guidance this week on still-raging inflation, Faang’s once-booming megacaps lost another $568 billion in market value, bringing the cohort’s total capitalization to an all-time low. since mid-2020.

With rising interest rates causing an abrupt end to Big Tech’s leadership, the biggest tech companies wield less and less power over broader indices, as former high-flyers like Meta Platforms Inc. and Amazon .com Inc. are collapsing again in the past few years. wave of sales. Reversing the extremes of the cheap-money years, the cap-weighted S&P 500 hit the lowest relative to an equally-weighted version of the benchmark since 2019.

All of this is a boon for so-called factor investors, who dissect stocks based on their mathematically-derived characteristics, from how cheap stocks look to how fast they have risen. These funds are typically underweight tech megacaps and tend to spread their exposures, a favorable setup in this era of improving market breadth.

In 11 of the last 13 sessions where the S&P 500 has fallen more than 2%, strategies favored by factor funds like value, quality, momentum and low volatility have all made money, indices show. neutral to the Dow Jones market.

“You have a much more diverse opportunity set that allows more factors to come into play,” said Sean Phayre, head of quantitative investing at Abrn Investment Management. “Before, 2019, 2020 was a very one-dimensional market.”

Systematic managers who deploy factor strategies in one form or another are on a winning streak. The AQR Equity Market Neutral Fund has rebounded again since October to post a 21% gain so far this year. The Jupiter Merian Global Equity Absolute Return Fund, which has bled its assets throughout the tech bull run, is up almost 7%.

Wall Street’s mathematical prodigies analyze data to find patterns throughout the stock market. This means that they mainly spread their bets across a large number of stocks. So when market gains are concentrated in a few megacaps, quants will almost by definition own far less of those stocks than a cheap and cheerful S&P 500 tracker. This was the case in the low-rate years when the Faang bloc — — Facebook Inc., now known as Meta, Apple Inc., Amazon, Netflix Inc. and Google’s parent company Alphabet Inc. — drove the bull market.

Today, a broader pool of winners provides fund managers with more opportunities. In a reversal of pre-2021 trends, the S&P 500 saw a roughly -8% rise in October, even with the Faangs falling by half.

Lately, the momentum factor, a popular quantitative trade, has also joined the party. A chameleon style of investing that simply bets on last year’s winners, it doesn’t do well at turning points like the start of 2022. But after rebalancing into outperforming stocks like healthcare and l energy, the strategy rallied this quarter in a sign of continuing trends driven by persistent inflation.

The $12 billion iShares MSCI USA Momentum Factor ETF (ticker MTUM) attracted a record $2 billion in inflows last month after its 13% rise beat the broader market in nine years of declines. ‘story. A market-neutral version compiled by Bloomberg is on track for the best year since 2015.

“Momentum is the all-weather strategy,” wrote Christopher Harvey, head of equity strategy at Wells Fargo, in a note. He expects more market damage from inflation and jobs data, touting momentum strategies as “they tend to perform well” under stressed conditions.

Meanwhile, 87% of high-momentum companies have exceeded earnings expectations this season, compared to 70% of the S&P 500, according to Harvey. These winning names are also rewarded more for good results and less punished for bad ones.

The value strategy of buying cheap stocks also saw another jolt, as rising rates drove investors away from high-multiple stocks. Meanwhile, the low volatility trade shines as more stable stocks like healthcare names prevail.

These trends have only intensified recently with US heavyweights like Amazon, Alphabet and Microsoft posting disappointing earnings – a big reversal from the unbridled tech optimism of the low rate era.

“The one dimension that was driving these names to excessive returns – this pattern is somewhat broken,” Phayre told Abrdn. “In 2021, 2022, we realize that there will be some form of recovery for all the cheap money.”

–With the help of Lu Wang.

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