January has marked one of the most volatile starts to the year given macro, political, and geopolitical uncertainty. The VIX index reached 31.2 on January 25th, up 81.0% year-to-date and currently at a one-year high.
As a result, most global equity indices have had the worst start to the year since 2008 and are approaching a ‘correction’ which is defined as a 10% drop from the most recent high.
Using Refinitiv Datastream, Exhibit 1 looks at the year-to-date performance for the Russell 1000 which is currently down 9.1%. The chart is a point-in-time comparison, meaning for each blue bar in the chart, it is looking at the performance from January 1st to January 25th of that year.
Over the last 22 years, the index has typically had a positive start to the year 12 times over this time-period.
Exhibit 1: Russell 1000 Year-to-Date Performance (Point-in-Time)
Source: Refinitiv Datastream
How far have companies come off their 52-week high?
We also look at a company’s stock price vs. it’s prior 52-week high to provide an indication of drawdown levels within the index. To date, 74% of constituents within the Russell 1000 index have experienced a drawdown of at least 10% or more. If we compare this to one year-ago, only 38% of constituents experienced a drawdown of at least 10% or more.
If we look at companies that have suffered a drawdown of at least 20% or more, 422 constituents fall into this category representing 41% of the index.
Finally, 22% of constituents have experienced a drawdown of at least 30% or more, while 9% of constituents have experienced a drawdown of at least 50% or more.
Exhibit 2 showcases this data for both the Russell 1000 index and a handful of global benchmarks.
Exhibit 2: Drawdown Levels for Global Equity Indices
The Russell 2000 Index has experienced the largest drawdown across most thresholds when compared against the selected basket of indices highlighted above. 29% of constituents have experienced a drawdown of at least 50% or more as of January 25.
Perhaps part of this explanation is due to higher commodity and wage inflation combined with a hawkish interest rate environment this year. This is likely to create a challenging environment for smaller companies who find it more difficult to manage higher costs and typically have a less flexible capital structure compared to larger companies, which may impact operating margins.
How does this look at a sector level?
With a hawkish fed, much attention has been focused on growth vs. value, as higher growth companies’ intrinsic value will decline with a higher discount rate.
Looking at the Russell 1000 Index, markets appear to be rational in how they reward certain sectors given the macro-outlook as shown in Exhibit 3.
Information Technology has fared worst both on an absolute and relative basis. On an absolute basis, the sector has seen 172 constituents experience a drawdown of at least 10% or more out of the 764 constituents in this category. Similarly, 123 constituents have experienced a drawdown of at least 20% or more out of the 422 constituents in this category.
On a relative basis, 94% of constituents within the information technology sector have experienced a drawdown of at least 10%, while two-thirds of the sector have experienced a drawdown of at least 20%.
Consumer Discretionary and Health Care come in second and third place respectively with the largest drawdowns.
Defensive sectors have held-up well as Utilities and Consumer Staples have experienced the lowest drawdown year-to-date. Energy has performed the best out of all sectors as most constituents are trading at record-highs given the surge in oil prices.
Exhibit 3: Drawdown Levels for Sectors within Russell 1000 Index
The forward 12-month P/E ratio for the Russell 1000 has declined by 7.0% year-to-date with a current reading of 20.5x compared to a long-term 10-year average of 17.3x, marking a 18.5% premium.
Refinitiv Datastream – Financial time series database which allows you to identify and examine trends, generate and test ideas and develop viewpoints on the market.
