Riskwatch for Q4 2020

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 are 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, consist 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 are now using Qontigo's WW4 (worldwide) model: predicted volatility by currency, predicted volatility by country and country-country correlations. Data are as of Dec. 31, 2020. Change compares to the previous quarter.

Dispersion is measured as the cross-sectional standard deviation of the monthly returns of all stocks in the respective benchmark, and can be thought of as measuring the spread between winners and losers in each market. The four quarters of 2020 each had the highest level of dispersion since at least 2012. It peaked in the first quarter but has remained high all year. Especially for investors picking individual stocks, this high level of dispersion suggests that there was a higher-than-average reward to picking the right stocks last year, but it also suggests that the penalty to being wrong was also higher. The high dispersion reflects the strong outperformance of the COVID-related "haves" vs. those companies likely to be hurt the most, as well as the reversal of those fortunes in the fourth quarter.