AI Frenzy Falters with Big Tech Sell-Off

Market Summary

US Market: 7/5/2024 - 7/11/2024

• US headline indices took a sharp fall this week. The Nasdaq took the brunt of the hit returning -3.1% over the five trading days ending Thursday. The S&P was not far behind at -2.6%, while the Dow came out ahead at only -1.1%.
• Big-tech saw a huge selloff this week, with the S&P 500 ending its longest streak without a 2% decline since 2007. The losses came as disappointing earnings results fueled concern that the market’s AI boom may be overblown.
• June PCE, a key data point for the upcoming Fed meeting, showed a monthly price increase of 0.1%, up 2.5% from a year ago, and a 0.2% rise in core inflation, up 2.6% from a year ago. While investors do not expect a cut in next week’s policy meetings, 99.6% of traders now expect at least a 25 bps cut by September, with 11.9% expecting a larger 50 bps cut.

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 saw a 15.4% return this week. This ranked in the 70th percentile since inception, and categorizes this week as “Volatile”.
• Factor influence was far lower than last week as only 20.6% of the portfolio’s return was attributable to factors. That level falls in the 38th percentile since inception and marks this week as “Alpha Driven.”
• Markets that are classified as both “Volatile” and “Alpha Driven” can be fruitful for fundamental managers, given that stock prices are moving significantly as a result of stock-specific reasons.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers portfolio was quieter than the US portfolio, returning 14.2% this week. This lands in just 24th percentile over the trailing twelve months and categorizes this week as “Neutral”.
• Factors accounted for 26.4% of the portfolio’s return which is in the 47th percentile since inception. That factor contribution places this week in “Neutral” territory.

US Extreme Movers Portfolio Exposures

• This week, Health Care soared to the top of the US portfolio's long book, achieving a 17% allocation and reaching the 94th percentile on a trailing twelve-month basis. All industries within the sector, except for Health Care Technology, contributed positively to this exposure.
• Utilities soared this week, jumping from a -7% allocation to 12%. This placed the sector in the 96th percentile for trailing twelve-month and the 95th percentile for inception-to-date. Half of this allocation came from the Electric Utilities industry alone.
• The Consumer Discretionary sector had a tough week with a -24% allocation, placing it in the 1st percentile on a trailing twelve-month basis. Within this sector, “Specialty Retail” and “Hotels, Restaurants & Leisure” had the largest short positions at -8% and -7%, respectively.
• Information Technology continued to be in the short section of the portfolio with a -11% allocation, placing the sector in the 17th percentile since inception. All industries within this sector had negative allocations, with Semiconductors & Semiconductor Equipment being the most significant at -7%.

• Beta and Volatility factors were notably low this week, with all factors landing in the bottom quintile. Both the long and short sides of the portfolio contributed to these negative exposures, with the short side having a greater impact. Volatility for the Wolfe model was particularly low at -1.16, with more than one-third of this exposure coming from the short position in the Consumer Discretionary sector.
• Similarly, Growth factors remained low this week. The 0.42 exposure to Barra’s Growth placed it in the 11th percentile since inception. Most of this allocation came from the long book of the portfolio, primarily from the Health Care sector.
• Value Factors were positive this week. Dividend Yield for Wolfe was notably high, landing close to the 90th percentile since inception. The short book was the primary driver of this exposure, but the long book also contributed positively.
• Crowding Factors were low this week, as investors chose to bet against hedge funds. Short Interest and HF Crowding were very low, with exposures of -0.72 and -0.34, respectively. For Short Interest, the long book was the main driver, suggesting investors favored names in hedge funds' short books. Conversely, the negative exposure for HF Crowding came from the short book, indicating investors were shorting names in hedge funds' long books.

International Extreme Movers Portfolio Exposures

• For the international portfolio, Financials emerged as the most represented sector this week, with a 15% allocation. This positions the sector in the 92nd percentile on a trailing twelve-month basis and the 86th percentile since inception.
• Health Care came in second with a 10% allocation, landing in the top decile for both TTM and ITD. All industries within this sector contributed to this exposure, with Pharmaceuticals being the primary driver, holding a 4% allocation on its own.
• On the short side, Information Technology was the most significant sector with a -16% allocation. This is notably low for the sector, placing it in the 3rd percentile TTM and the 2nd percentile ITD. The main contributors to this short exposure were Electrical Equipment and Semiconductors.
• Materials was also out of favor this week, with a -15% allocation, placing the sector in the 4th percentile on a trailing twelve-month basis. This was primarily driven by the Metals and Mining industry, which accounted for more than two-thirds of the total exposure.

• Similar to the US portfolio, Beta and Volatility factors were notably low this week. The Beta factor from the Barra model was very low, with an exposure of -0.79, placing it in the 3rd percentile on a trailing twelve-month basis. This negative exposure to Beta primarily came from the long book, indicating that investors were more cautious this week and opted to buy names with low volatility.
• Growth factors were also low this week, especially for the Barra model where it showed an exposure of -0.39 which landed in the 3rd percentile since inception. The short positions to the information technology and materials were the main drivers of this negative exposure.
• Value factors were strong this week, with Dividend Yield and Earnings Yield landing in the top quartile for both ITD and TTM. The short book was the main contributor to the positive exposure to momentum, indicating that investors chose to bet against names with weak fundamentals.

International Extreme Movers Portfolio Country Exposures

The chart presents the portfolio's exposures to various groups in the Developed and Emerging Markets, highlighting the three most notable country contributors for each respective group's allocation.

• Developed markets continued to be in favor this week, with a 14% allocation. This places the sector in the 56th percentile on a trailing twelve-month basis and the 66th percentile since inception.
• Within the developed markets, Europe & the Middle East was the most represented sector, with a 12% long allocation. This was led by Denmark, which contributed 4% on its own, placing it in the top percentile TTM.
• For Emerging Markets, The Americas had a tough week with a -12% allocation, landing in the bottom percentile on a trailing twelve-month basis. This was primarily driven by Brazil, which contributed -8% on its own. Conversely, the Europe, Middle East & Africa region performed well with an 11% allocation.

Regards,
Kevin