Two distinct phases to the recovery in markets since mid-October

Anticipation of a pivot in the degree of Fed hawkishness was the catalyst behind the recovery in risk appetite that commenced in mid-October last year. This positive momentum continued in January producing a return of 6.9% for the FT Wilshire 5000 for the month. From the mid-October low, the FT Wilshire 5000 had appreciated 14.5% to the end of January.

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Exhibit 1: The risk rally that started in mid-October last year continued into January

^{Source: Wilshire. Data as of January 31, 2023.}

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However, the rally can be dissected into two distinct phases

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Exhibit 2 breaks the rally in the FT Wilshire 5000 since mid-October into two phases (October to December versus January). In the first phase, the rally was still defensive in nature represented by the marked outperformance of the Value style. By contrast, January saw a similar return for the market but this time it was driven by the outperformance of the Growth style.

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Exhibit 2: A rotation to the Growth Style in January

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^{Source: Wilshire. Data as of January 31, 2023.}

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The decline in real yields has contributed to the rally in the Growth style

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Exhibit 3 shows relative performance of the FT Wilshire large Cap Growth versus Value and the US 10yr TIP real yield inverted. Style rotation responds to inflections in the real yield. The decline in the real yield in January has contributed to the Growth style outperforming the Value style by 5.7%  

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Exhibit 3: Growth style outperformed in January helped by falling real yields

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^{Source: Wilshire, Refinitiv. Data as of January 31, 2023.}

Growth benefitted from the contribution from 4 sectors in January

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Exhibit 4 compares the sector weighted contributions to the returns for the Growth and Value style indexes in January. Growth benefitted significantly  from the larger respective contributions generated by four sectors - Digital Information, Technology, Consumer Goods and Transportation. These tend to be seen as long duration growth sectors that respond positively to declining real yields.

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Exhibit 4: Comparing the sector weighted contributions for Growth and Value

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^{Source: Wilshire Data as of January 31, 2023.}

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