Due to artificial intelligence turmoil, on January 27, 2025, there was a nearly 4-sigma divergence between high beta and low volatility large caps. A few things you should know.
On January 27, 2025, due to turmoil in the artificial intelligence space caused by the release of DeepSeek, the S&P 500 high beta total return index fell 4.2% while the S&P 500 low volatility total return index gained 1.5%. The magnitude of the divergence in favor of low volatility was 5.84%.
From their start in 1991, the S&P 500 high beta total return index ($SP5BHIT) and the S&P 500 low volatility total return index ($SP5LVIT) have diverged in sign 28.1% of the time, with a mean difference of 0.04% and a standard deviation of 1.6%. A divergence of -5.8% on January 27, 2025, was the largest since October 23, 2008, during the GFC bear market, and nearly a 4-sigma event.
A few things you should know:
Since 1991, low-volatility large caps have outperformed high-volatility large caps with a total return of 2,992% versus 2,852%.
The dot-com and GFC bear markets were the reason for the high beta underperformance for nearly a decade and until about 2020. Then, due to deficit spending and speculative investments in technology, high-beta large caps took the lead again, and since 2010, they have outperformed low-volatility large caps, with a total return of 514% versus 405%.
Another bear market will probably undo the outperformance of high beta in the last 15 years and pose a challenge once again to the maxim that “higher returns require higher risks.” As mentioned above, since 1991 this maxim has not held. We are inclined to rephrase the maxim as follows: “Higher returns necessitate significant deficits.”
Regardless, investing in low-volatility stocks appears to be a better choice for many investors due to the lower volatility and risk, while historically the return potential has not been compromised.
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Charting and backtesting program: Amibroker. Data provider: Norgate Data
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