A Debt Ceiling Stalemate Leaves Plenty of Alpha on the Table

Market Summary

US Market: 5/5/2023 - 5/11/2023

• After a strong close to the week prior, US headline industries held fairly steady through Thursday’s close. The Nasdaq finished just above 3.0%, while the S&P and Dow followed at 1.7% and 0.5%, respectively.
• Although a deal has not yet been agreed upon, progress has reportedly been made in conversations surrounding the US government budget and the current debt ceiling. Experts generally believe both sides will come to an agreement on raising the borrowing limit, which would provide relief for investors who are weighing all outcomes.
• The April CPI data showed a slowing rate of inflation as the index rose 0.4% and 4.9% over last year. The reading was lower than the 5% consensus and lower than the 5% reading in March which gave some investors hope that inflation might at least be beginning to pull back.

Extreme Movers Portfolio Performance

Note: Extreme Movers definitions can be found in Factor University on our website.

US Extreme Movers Volatility and Factor-Driven Speedometers

• The US Extreme Movers portfolio posted a return of 26.7% this week, which lands in the 95th percentile of all weeks since January 2007.
• Very little factor movement made way for a “Very Alpha-Driven” week as idiosyncratic, stock-specific volatility accounted for almost 91% of the portfolio’s return. The alpha influence this week also fell in the 95th percentile since inception.
• Elevated levels of equity volatility are often the result of macroeconomic catalysts and therefore tend to be factor-driven. This is the first week since October of 2008 that the US Extreme Movers portfolio has pointed to this level of alpha-driven volatility in the market, which is great news for fundamental stock-pickers.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The market dynamics across the international markets differed from the US. The International Extreme Movers portfolio returned 16.1% this week which just squeezed into the 2nd quintile since inception.
• 22.7% of that return was driven by market factors which designated this week as “Alpha-Driven”. Volatility paired with alpha influence is always welcome to fundamental investors but there was just a little less of both for international managers this week.

US Extreme Movers Portfolio Exposures

• Sector allocations were more muted this week, with Information Technology topping the portfolio. The 17% long allocation was in the top quintile since the inception of the Extreme Movers portfolio (2007). Software dominated the long allocation, while Semiconductors and Communications Equipment remained in negative territory.
• In a reversal from last week, Industrials fell to the 6th percentile TTM and the 9th percentile since inception. The 11% short allocation was made up largely of Professional Services stocks.
• Financials returned to a moderate allocation this week. The 3% long allocation was driven by Consumer Finance as well as a recovery in Banks.

• Style factors leaned into beta and volatility, driven heavily by the long allocations to Information Technology and Financials, particularly within Software, IT Services, and Banks.
• Slight aversion to interest rate sensitivity continued this week but was dominated by Information Technology, Materials, and Real Estate, as investors regained some confidence in Banks.
• Value factors remained down, large thanks to anti-value sectors like Information Technology and Consumer Discretionary rallying. Some attention returned to Growth, with investors leaning back into Software.
• Short Interest stayed positive this week, as popular shorts rallied particularly in Consumer Discretionary and Health Care. HF Crowding was also positive, thanks to popular tech names.

International Extreme Movers Portfolio Exposures

• Sector allocations were more extreme in the International portfolio than they were in the US portfolio this week, with Financials leading the pack. The 20% long allocation was dominated by a push in Banks and Capital Markets stocks within Hong Kong and China.
• Consumer Discretionary and Information Technology both moved into negative territory, with 8% short allocations that landed them in the bottom quintile since the portfolio’s inception. Textiles Apparel & Luxury Goods as well as Hotels, Restaurants, and Leisure, dominated the positioning in Consumer Discretionary. Semiconductors were the main culprit in Information Technology.
• Oil, Gas, & Consumable Fuels stocks in Canada recovered from their negative positioning last week, driving almost 40% of the long allocation to the Energy sector. Brazil and Hong Kong also contributed to the position, which was in the 90th percentile on a trailing twelve-month basis.

• Investors were keen on Value in the International portfolio this week, with allocations landing in the top 15% TTM across all value factors. The rally in Financials was the main driver.
• HF Crowding exposure was in the 94th percentile TTM, as investors leaned into popular hedge fund longs in Hong Kong, Brazil, and China.
• Long allocations to Energy and Financials drove a slight rally in Oil Beta and Interest Rate Beta, in a reversal from last week’s positioning. Investors moved into stocks with positive relationships to interest rates and oil and avoided stocks with a negative relationship to interest rates.

• The International Extreme Movers portfolio focused heavily on Emerging Markets and stayed away from Developed markets this week.
• Americas Emerging Markets led the portfolio with a 22% long allocation in the 96th percentile since inception, which was driven primarily by Brazil.
• Europe & Middle East had negative allocations within both the Developed and Emerging Markets. The Emerging Markets were driven largely by a shift away from South Africa, while the Developed Markets were positioned increasingly away from Sweden, Germany, and France.

Regards,
Reshma

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