{"id":37068,"date":"2020-03-04T09:33:00","date_gmt":"2020-03-04T14:33:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=37068"},"modified":"2022-11-21T09:45:09","modified_gmt":"2022-11-21T14:45:09","slug":"feb-2020-smart-beta-quantz","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/ibkr-quant-news\/feb-2020-smart-beta-quantz\/","title":{"rendered":"February 2020 Smart Beta Book \u2013 The factor landscape YTD after the sell off"},"content":{"rendered":"\n

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The factor landscape YTD after the sell off<\/strong><\/p>\n\n\n\n

The market had been whistling past the graveyard as\nArmageddon swept across China. We said last week that, \u201cwith Covid-19 rapidly\nspreading across Italy this weekend not to mention the series of infections in\nJapan & Korea, markets are likely to remain under pressure\u201d before the\nswiftest six-day correction in the history of US markets. It\u2019s\nno surprise that China’s draconian quarantining measures have led to an\nunprecedented crash in both the manufacturing and non-manufacturing PMIs there\n(February). However, with Covid 19 already in 65 countries & the 1st\nconfirmed case just reported in NYC not to mention 6 deaths in WA state, it\u2019s\nclear that all such measures might not contain this contagion (literally &\nfiguratively). The fact is that it\u2019s likely to spread just like the common\ncold\/ flu across the world eventually exposing everyone since the transmission\nis airborne. Down the road it may become a permanent seasonal fixture along\nwith the various strains of influenza that we inoculate against each flu season\nonce there is a vaccine. Not enough is known about the disease propagation\nyet but we do know that the Ro (2-2.4 transmission rate) is high (<\/em>https:\/\/www.facebook.com\/teppercmu\/videos\/223086638736293\/<\/em><\/a>
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\nThe seven day (20th<\/sup> Feb \u2013 28th<\/sup>\nFeb) -13% haircut to the SPX qualifies as the fastest correction in history.\nHowever, it was an orderly decline without the usual histrionics caused by\nliquidity holes, flash crashes, margin calls and systemic outages a la 2008\n(those are likely still to come like the Robinhood outages). As anticipated by\nthe Fed fund futures market we got the 50bps emergency rate cut by the Fed\ntoday. We expect global coordinated rate cuts to follow even though with so\nmany rates in negative territory, central bankers are mostly out of ammunition\nunless they resort to non-traditional monetary stimulus. While timely, these\nmeasures cannot revive patients or economic activity unless we get past the\ncurtailment of public activities, travel & quarantining once there\u2019s a\nrealization that the spread can be slowed but not easily stopped. Demand\ndestruction of this nature cannot be fixed by rate cuts nor can it\nrestore the supply chain disruptions. That realization alone could\nbring the buy every dip mentality to a halt. Indeed, the markets negative reaction\nto the cuts intraday would suggest that the Fed may have wasted precious little\nammunition left (caving into political pressure) while this Administration\nsquanders every opportunity towards constructive preparedness down in the\ntrenches. <\/em>
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\nIt remains to be seen if this movie has a\nmacabre ending like that of the Spanish Flu of 1918 or a more benign denouement\nlike that of SARS which died out once the virus mutated & people distanced\nthemselves from civet cats \u2013 the proximate source. Best to keep an eye on the\nlatest data from the WHO here: <\/em>https:\/\/github.com\/CSSEGISandData\/COVID-19<\/em><\/a>
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\nThe bottom line is that the extreme measures\nbeing taken by countries in terms of school closures, cancellation of events\/\nconferences, curtailment of travel etc is likely to plunge the global economy\ninto a recession just as we saw with the abysmal Chinese PMIs.  10y yields\nplummeting to historic lows (0.98% intraday) may already be pricing in a\nglobal recession with the global PMI heading south of 50. It may also\nboost the bond proxies further & lead to an even greater blow off top in\nsuch factors as Risk (Low Vol). The related \u201cBernie\u201d factor is also getting\npriced in which may explain why Healthcare has not held up better vs Biotechs \u2013\nSuper Tuesday shall tell. The looming recessionary prospects & uncertain spread\nof Covid 19 present obvious challenges to any factor prognostications hence\nlet\u2019s focus on taking stock of what happened in Feb, YTD and where that might\ntake us next<\/em><\/p>\n\n\n\n