Surprise, Surprise – The Most Significant Drivers of 1M Returns are the USD and Market CapOctober 07, 2014
Each day we recalculate and rank the significance each of 30 factors has played to individual stock performance over various rolling periods. In this way we can get a better idea of the qualities of individual stocks the market is favoring and shunning, and this helps us put the puzzle pieces together. We call this our factor scoring work.
We highlight this today to point out the simple fact that one month returns of individual stocks have been nearly 100% correlated to both a stock’s histoical price correlation to the USD and it’s size. As the first table below shows, both of these factors have an r-squared to performance of .96, meaning they explain 96% of the performance over the one month period.
Tables two and three below show the performance breakdown by decile for the USD correlation and size factors. From here we can clearly see how stocks whose price action shares a strong historical correlation to the USD have performed the best and the largest stocks have performed the best. In fact, stocks in the highest decile of USD correlation outperformed stocks in the lowest decile by 6.6% over the last month. Similarly, stocks in the highest decile of market cap outperformed stocks in the lowest decile of market cap by 5.4%.