AGF Logo
  • Home
  • Industry and Expert Views
  • Investing and Market Views
  • Capitol Insights
  • Français
  • AGF.com
Skip to content
AGF logo
Insights and Market Perspectives
  • Industry and Expert Views
  • Investing and Market Views
  • Capitol Insights
  • Contributors
  • Français
  • Search
Search
Close
Three Takeaways from the Summer Rally in Stocks

  • Investing and Market Views

For Print Only Logo
Insights and Market Perspectives

Three Takeaways from the Summer Rally in Stocks

Author: Abhishek Ashok

September 9, 2022

Every month (or so), AGFiQ highlights the investment factors that are helping shape equity markets. Today’s focus includes the risk on/risk off nature of the rebound in stocks and what the PMI cycle means for factor performance going forward.

Risk On, but Not Quite Risk Off

The rally in U.S. stocks from mid-June to mid-August was led by a slew of risk-on names, including small capitalization, low-quality, high-volatility growth companies that outperformed the broader market by roughly 10% on average near the end of July (see illustration 1) and closer to 20% in early August, according to AGFiQ research. But large capitalization, high-quality stocks that are normally associated with more risk-averse positioning did almost as well throughout this period. Moreover, the returns of these two trades at opposites ends of the risk spectrum can be considered extreme based on their larger-than-average deviation from historical performance spreads to the broader market.

Strong Returns on Both Ends of the Risk Spectrum

Small Cap + Growth + Low Quality + High Vol

Large Cap + High Quality

Source: AGFiQ using data from FactSet as of August 10, 2022. One-Month rolling return of stocks in the top quintile based on the respective factors in the top 1,200 securities in the U.S. by market cap.

Trend Versus Trade

Recent market action may be best explained not as a trend that will continue, but as a trade that is typical in the current “slowdown” stage of the Purchasing Manager Index (PMI) cycle. In fact, there tends to be a great deal of back and forth in factor performance when PMI scores have peaked, like they seem to have in several countries over the past few months, but haven’t yet fallen below 50, the line that separates business expansion from contraction. More specifically, there tends to be an initial – and often significant – rotation into low-volatility and low-beta stocks, much like was experienced earlier this year. This knee-jerk reaction is then followed historically by a “beta” bounce, meaning high-beta stocks outperform low-beta stocks in similar fashion to what happened this summer, while overall factor positioning becomes a bit more neutral until the PMI cycles transition further and mark a business cycle recession. It’s also true historically that quality and growth tend to do better than other factors near the end of this process.

Momentum Shift

In the previous blog of this series, momentum stocks were highlighted for their extreme volatility as well as their makeup as it relates to underlying factors. Since then, the performance of momentum stocks has normalized – especially when considering changes over a three-month period. For example, momentum’s exposure to the consumer discretionary and information technology sectors was abnormally low earlier this year, but has almost returned to normal and could be moving towards an opposite extreme of abnormally high exposure to these sectors in the short term (see illustration 2). Similar dynamics are in play for sectors like consumer staples, utilities and energy, albeit in reverse. Instead of moving from low-to-high, momentum exposure to these sectors has fallen dramatically from where it was just a few months ago.

Sector Exposures of U.S. Momentum Stocks

Source: AGFiQ using data from FactSet as of August 10, 2022. Three-month price change exposure of sectors in the top 1,200 securities in the U.S. by market cap.

Putting all this together, there is still room for many of the extremes we saw in the first half of the year to continue to normalize. But given where we are in the business cycle, there is a high probability for investors to expect more factor volatility and sharp reversals in short-term performance extremes.

Click to learn more about our Quantitative capabilities.

Click to learn more about our Quantitative capabilities.

Click to learn more about our Quantitative capabilities.


The views expressed in this blog are those of the authors and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.

The commentaries contained herein are provided as a general source of information based on information available as of September 2, 2022 and are not intended to be comprehensive investment advice applicable to the circumstances of the individual. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Market conditions may change and AGF Investments accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained here.

References to specific securities are presented to illustrate the application of our investment philosophy only and do not represent all of the securities purchased, sold or recommended for the portfolio. It should not be assumed that investments in the securities identified were or will be profitable and should not be considered recommendations by AGF Investments.

AGFiQ is a quantitative investment platform powered by an intellectually diverse, multi-disciplined team that combines the complementary strengths of investment professionals from AGF Investments Inc. (AGFI), a Canadian registered portfolio manager, and AGF Investments LLC (AGFUS), a U.S. registered adviser.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

® The “AGF” and ™ “AGFiQ” logos are registered trademarks of AGF Management Limited and used under licence.

20220908-2411546

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit AGF.com.

© 2023 AGF Management Limited. All rights reserved.

Written by

Abhishek Ashok

Abhishek Ashok, M.A., MFE, CFA®

Analyst

AGF Investments Inc.

More from Abhishek Ashok

  • Investing and Market Views

Why Last Year’s Stock Market Laggards Are This Year’s Early Winners

March 3, 2023

  • Investing and Market Views

Yes, Markets Are Oversold. But Investors Still Need to Be Cautious

November 24, 2022

  • Investing and Market Views

What is Momentum Telling Investors Right Now?

August 4, 2022

  • Investing and Market Views

Should Equity Markets Really Be This Volatile?

June 20, 2022

Get perspectives straight to your inbox.

Subscribe now

More articles like this

Why Some Market Participants Are Worried About “Zero Day to Expiry” Options Trading

  • Investing and Market Views

Why Some Market Participants Are Worried About “Zero Day to Expiry” Options Trading

John Christofilos | March 16, 2023

As 0DTEs grow more ubiquitous, the level of risk attached to them continues to grow, too.

Read More
What The Collapse of Two U.S. Banks Could Mean for Markets

  • Investing and Market Views

What The Collapse of Two U.S. Banks Could Mean for Markets

Kevin McCreadie | March 14, 2023

This doesn’t appear to be another 2008-era financial crisis, but markets will remain volatile for as long as there is uncertainty about the Fed’s next move(s) and the overall state of the economy and banking system, says AGF’s CEO and Chief Investment Officer.

Read More
Why It’s Too Early to Claim Victory Over Inflation – Or Recession Concerns

  • Investing and Market Views

Why It’s Too Early to Claim Victory Over Inflation – Or Recession Concerns

David Stonehouse | March 9, 2023

Bond yields could be rangebound in 2023 after the substantial backup in 2022.

Read More
AGF Logo
  • Industry and Expert Views
  • Investing and Market Views
  • Capitol Insights
Follow AGF

AGF Web Site Pages © 2023 AGF Management Limited. All rights reserved.

  • Terms & Conditions
  • Privacy
  • AGF.com