Venn by Two Sigma February 2024 Factor Performance Report: Higher Than Expected Inflation and NVIDIA’s Earnings

Exhibit 1: February Performance of the Two Sigma Factor Lens

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_{Source: Venn by Two Sigma. The median and percentile columns measure the performance of each factor in the Two Sigma Factor Lens relative to the entire history of the factor in USD, using monthly data for the period Oct 1997 - February 2024.}

A Look at Single Day Factor Performance

While on the surface, it may seem like this report focuses on only two days of the month, each day represents a shock to prevalent market themes. The first being the recent US CPI print, representing the theme of sticky inflation and higher for longer rates, and the second being NVIDIA’s earnings, which in today’s market, can be examined as an indicator for both AI trends and even equity markets broadly. 

Exhibit 2: Single Day Performance of the Two Sigma Factor Lens

Source: Venn by Two Sigma. Inflation print refers to performance on 2/13/2024, while NVIDIA Earnings refers to performance on 2/22/2024.

Higher than Expected Inflation: 

• Equity and Interest Rates continue to respond in the same direction whenever US inflation runs hotter than expected. For example, on the day of the most recent US CPI print, they were down -0.95% and -0.40% respectively. Before the inflation print on 2/13, our Equity factor was up 2.56% for the month, while our Interest Rates factor was down -1.05%.
  
  
• Small Cap is the only equity style that is in negative territory since the Fed began fighting inflation in March 2022. This underperformance was again emphasized on the day of the US CPI print, with the factor returning -0.85%. 
  
  When isolating periods of higher than 2% YoY CPI, small caps have underperformed large caps when inflation rises further.³ One might interpret rising inflation and higher than expected inflation as similar phenomena, which may explain our Small Cap factor’s underperformance after the US CPI print. 
  
  One explanation for underperformance amid higher inflation is the idea that smaller companies may have a more difficult time passing on the higher costs of production to their consumers. Notably, in these high inflation regimes, small caps outperformed when inflation fell. 

• Fixed Income Carry’s short basket was well positioned after the US inflation print. More specifically, it benefitted from jumps in yields across US, Canadian, and UK 10-year bonds, which rallied on expectations for higher-for-longer rates in the US. Japanese and Australian 10-year bond yields only slightly increased on the day, limiting losses in the factor’s long basket.  

NVIDIA Earnings

While not a recommendation of any security, portfolio, or strategy, the market’s reaction to NVIDIA’s earnings are instructive when viewed through the Two Sigma Factor Lens:

• Momentum has had a strong start to the year, up 15.23% as AI, technology, and higher-for-longer themes have become robust trends in equity markets. On the day after NVIDIA’s earnings, Momentum showed significant sensitivity to the news, rallying 2.17%. Notably, Momentum and Quality are the only equity styles that currently have meaningful net long positions to the tech sector more broadly, a significant driver of performance on this day.
   
• Value is negatively correlated with both Momentum and Quality over the long term, which in part has to do with typically being net short tech companies like NVIDIA and the tech sector generally. Being short themes such as AI and technology have translated into recent struggles for this factor. It is down -2.09% year to date, and fell -0.64% on the day after NVIDIA’s earnings. 
  
  
• The Equity factor also rallied on the news of NVIDIA’s earnings, providing further evidence of the weight that market’s have placed on the company’s results. Of course, NVIDIA also makes up 2.78% of investable global market-cap, and was up 16.40% on the day.⁴ So while many might see NVIDIA’s performance as symbolic for equity markets, there is a strong fundamental connection, as well.
  
  
• Trend Following is currently net long equities, benefitting from the broad rally on the day after NVIDIA’s earnings. More specifically, its equity trend following sleeve was up 0.53% on the day.

References

¹ https://www.bloomberg.com/news/articles/2024-02-21/nvidia-s-high-stakes-earnings-moment-has-entire-market-on-edge

²  More specifically, the headline YoY US CPI was 3.1% versus an expected 2.9%. Core CPI was 3.9% versus 3.7% expected. https://www.barrons.com/livecoverage/cpi-inflation-data-january-report-today

³ https://www.msci.com/www/quick-take/the-ups-and-downs-of-small-caps/04016427937

⁴ Referenced from the iShares MSCI ACWI ETF (ACWI) as of 2/29/2024

References to the Two Sigma Factor Lens and other Venn methodologies are qualified in their entirety by the applicable documentation on Venn.

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