RiskWatch for Q3 2023

RiskWatch provides recent data on volatility and correlation, the two components of risk, for U.S. and global equity and fixed-income markets. The equity data is derived from Qontigo's medium-term fundamental risk models. One set of tables is designed to capture U.S. market sectors plus countries and currencies with the highest and lowest levels of volatility, and how that component of risk has changed since the end of the prior quarter. The highest and lowest correlated countries within developed and emerging markets are also highlighted. Another table illustrates how currency volatility can be a major driver of risk in multicountry benchmarks and can often change substantially from one quarter to the next. The fixed-income data, detailed in the multiasset-class section, consists of U.S. and eurozone government yields, investment-grade and subinvestment-grade spreads as well as correlations among those asset classes and selected currencies. Note that the following charts use the Axioma WW4 (worldwide) model: predicted volatility by currency, predicted volatility by country and country-country correlations. Data is as of Sept. 29, 2023. Change compares with the previous quarter.

The Magnificent Seven stocks — Amazon, Apple, Alphabet (Google), Meta, Microsoft, Nvidia and Tesla — make up more than a quarter of the U.S. market and have been driving the U.S. outperformance in 2023. They have also been dominating the U.S. market volatility, contributing nearly 40% to the STOXX US index risk.

In the aftermath of the COVID-19 pandemic, we saw an extraordinary pattern for which the risk of the seven-stock portfolio was remarkably similar to that of the 600-stock U.S. index. But this anomaly was short-lived and the risk gap between the Magnificent Seven and the U.S. market has reverted to the historical trend, whereby the Magnificent Seven's risk is mirroring that of the U.S. market albeit at a higher level, as measured by Axioma's US4 Fundamental Short-Horizon Model.

Although it ticked up at the end of September, risk has fallen for the Magnificent Seven and for the U.S. market as a whole (with or without these seven stocks included) throughout the year. Without the Magnificent Seven, the U.S. market would have underperformed, but it also would have had a slightly lower risk.