Alpha-Driven Volatility Drives Stocks Through Fed Comments

Market Summary

US Market: 4/26/2024 - 5/2/2024

• US headline indices showed positive returns over the last five trading days ending Thursday. The Nasdaq had the strongest week with a 1.47% return. The Dow and the S&P 500 followed at 0.37% and 0.31%, respectively.
• On Wednesday, Federal Reserve Chairman Powell reiterated that economic data has not yet provided the confidence needed to begin cutting rates. However, he did note that, despite inflation, “it’s unlikely the next policy rate move will be a hike”.
• Friday’s US jobs report revealed that the job market slowed more in April than economists had anticipated. The economy added 175,000 new jobs, notably lower than the 240,000 consensus. Unemployment also rose from 3.8% to 3.9% in April.

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 market remained in “Volatile” territory as the US Extreme Movers portfolio returned 16.7% this past week. That return falls in the 77th percentile since inception, just shy of the top quintile.
• Factors accounted for just 6.5% of the portfolio’s return this week which marks the 3rd percentile since inception and categorizes this week as “Very Alpha-Driven”.
• Weeks that are both volatile and very alpha-driven are advantageous for fundamental investors as stock prices are moving strongly due to idiosyncratic reasons rather than common, systematic factors.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers Portfolio saw a return of 16.2% which categorizes this week as “Volatile”. That return places this week in the 66th percentile since inception.
• Factor returns accounted for 21.6% of the total, landing in the 26th percentile since inception and earning an “Alpha-Driven” classification.

US Extreme Movers Portfolio Exposures

• This week, the Materials sector took the lead with a significant 26% allocation, placing it at the 98th percentile for TTM. Driving this surge was the Containers and Packaging Industry, which contributed by 5% alone.
• Health Care witnessed the second-highest representation this week, shifting from a -7% allocation last week to a 3% allocation this week. Within the sector, Pharmaceuticals stood out as the most represented industry, contributing 3%. Conversely, Health Care Providers saw a -2% allocation.
• Financials experienced a substantial shift this week, transitioning from the highest long allocation to the lowest short allocation at -9%. This placement positioned it in the 12th percentile for both trailing twelve-month and inception-to-date. All industries across the financial sector, saw negative exposures, with Financial Services being the primary driver at -4%
• Energy also exhibited a notably low allocation, standing at -6% and placing it in the 18th percentile for trailing twelve-months. Both the Oil, Gas & Consumable Fuels and Energy Equipment & Services industries contributed to this allocation, with -5% and -1%, respectively.

• This week, value factors, particularly Earnings Yield, fell out of favor, landing in the bottom quartile for both TTM and ITD. This negative exposure was fueled by both the long and short sections of the portfolio. This shows a notable shift in sentiment as investors favored more expensive stocks relative to earnings.
• Crowding factors were mixed. HF crowding showed a high exposure of 0.33, positioning it in the 77th percentile for trailing twelve-months. The long book primarily drove this exposure. Conversely, ETF flow saw a low exposure this week, influenced by both the long and short books of the portfolio.
• Beta and Volatility factors were slightly positive this week, with most factors hovering around the 50th percentile for inception to date. Residual volatility stood out, landing in the 76th percentile for trailing-twelve months. This surge was primarily propelled by the long book, indicating that investors favored "risk-on" stocks in their long books.

International Extreme Movers Portfolio Exposures

• In contrast to the US portfolio, Financials remained as the top allocation this week, comprising 10% of the portfolio and landing in the 82nd percentile based on trailing twelve-month data. This allocation was predominantly driven by Banks which contributed 6.6% alone.
• Health Care had a notably high representation at 8%, landing in the top decile since inception. All industries within the Health Care sector contributed to this allocation, with Pharmaceuticals emerging as the primary driver, accounting for almost 5% of the total allocation.
• Real Estate witnessed its highest allocation for the trailing twelve months, reaching 8%. Driving this positive allocation was the Real Estate Management & Development sector.
• On the flip side, Consumer Discretionary emerged as the sector with the lowest exposure, standing at -13%, placing in the 2nd percentile for trailing twelve months. Contributing to this negative exposure were all industries within the sector except for Household Durables.

• Crowding factors were favored this week, with both Short Interest and HF Crowding landing in the top quartile since inception. This trend was driven by the short book, suggesting that investors were generally selling unpopular longs as well as unpopular shorts.
• Beta and Volatility factors were also favored this week, with the exposure primarily coming from the short book. This suggests that investors bet against less volatile stocks.
• In contrast to the US portfolio, quality factors were out of favor this week for the International Portfolio. Profitability, in particular, was notably low, landing close to the bottom decile for TTM. This exposure came from both the long and short books, indicating that investors opted for a riskier stance this week, favoring names with low profitability while betting against those with high profitability.

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.

• This week, investors heavily favored Emerging Markets, allocating a significant 42% long position to this sector. This allocation placed EM in the 93rd percentile TTM.
• Asia led the EM allocation mainly driven by China which accounted for 27% of the total and landing in the top decile since inception. Europe, Middle East and Africa accounted for 10% with South Africa being the main driver at 9%.
• On the other hand, Developed Markets saw a -43% allocation landing in the bottom decile for TTM and ITD . This was mainly driven by the Pacific which account the for -25%. Japan was the least represented country in this region at -23% which placed it in the bottom decile for TTM.

Regards,
Jose