Alpha Drives US Markets, While China Takes the Global Stage

Over the past several months, we've introduced Extreme Movers, the latest tool in our arsenal to understand what is driving markets from week to week. We also debuted an international version of the Extreme Movers portfolio to help investors compare fluctuating alpha opportunities and factor-driven dynamics between the US and the world. The Extreme Movers portfolios allow us to apply hindsight to the prior week's momentum to understand the following key questions better:

1. Was the preceding week an alpha-driven or factor-driven week?
2. What are the factor characteristics of the stocks that drove the market?

The Extreme Movers portfolios are weekly-rebalanced, market-neutral portfolios that consist of the top decile of stocks from the Russell 1000 and the MSCI ACWI ex-US, respectively, based on performance on the long side and the bottom decile on the short side. You can find additional information on the construction of the Extreme Movers portfolio in the May 22 edition of Factor Spotlight.

US Market Summary and Extreme Movers Metrics

US Market: 11/25/2022 - 12/01/2022

• Stocks rallied late this week after Fed Chair Jerome Powell hinted at a slowdown in rate hikes. For the five days ending Dec 1, the Nasdaq returned 1.75%, with the S&P 500 close behind at 1.22%. The Dow finished at 0.59%.
• However, the picture on future interest rate hikes may become muddied, as the US jobs report released on Friday morning came in hotter than expected, with the US economy adding 263,000 jobs in November (compared to expectations of 200,000 jobs).
• Chinese markets saw heavy volatility over the last week as local protests erupted against the Covid lockdown policy, and the government subsequently signaled the potential for future easing of the policy.

Extreme Movers Portfolio Performance

Please note that the portfolio's return will always be positive by constructing a portfolio that is long the top movers and short the bottom movers in an index. That said, there are several areas we want to observe around weekly performance:

1. Is the weekly performance below or above the recent median weekly performance? Above the recent median means that the Extreme Movers portfolios had much higher dispersion than a typical week, most likely driven by higher factor volatility.
2. Is the weekly alpha contribution below or above the recent median alpha contribution? Above the recent median demonstrates that the significant market moves were more alpha-driven than in a typical week. Below the median, the market moves were more factor-driven than in a typical week.

• The US Extreme Movers portfolio experienced heavily depressed dispersion, with this week’s return of 10.5% coming in at the lowest level seen all year.
• Despite the low return, alpha contributed 84% to the total performance; this was in the top 5% of alpha contribution on a YTD basis.
• Style contribution was meager this week, with only a 6% contribution to total return; short positions in Oil & Gas and Capital Goods drove industry contribution of 11%.

• The International Extreme Movers portfolio showed a modest return this week of 19.3%, which is in the mid-range of the YTD weekly return distribution.
• Country factors contributed 29% to the total return, landing in the top 2% of YTD weekly country contributions. A rally in Chinese stocks late in the week drove the country performance.
• Style and sector factors showed notably low contribution, contributing only 3% and 4% to total return, respectively.

Extreme Movers Portfolio Exposure

Looking at the Extreme Movers from an exposure lens helps us decompose the individual styles and sectors associated with the portfolio's factor-driven performance and better understand broader patterns such as risk-on / risk-off or sector rotation.

To provide a relative perspective on the size of the exposures, we’ve adjusted the third column from YTD Average to YTD Ptile (“percentile”). With >200 trading days into the year, we’ll highlight any exposures that are in the top 10 trading days (95%+) or any exposures in the bottom 10 days (<5%).

• The US portfolio took on barbell positioning this week, with extreme long exposure to Consumer Discretionary and Health Care and extreme short exposure to Energy and Industrials.
• Short allocation to Energy was mainly driven by Oil & Gas. The Energy, Industrials, and Materials exposures were all in the bottom 10% of YTD allocations for their respective sectors.
• Communication Services was the third largest overexposure this week and is in the top 10% of allocations for the sector YTD.

• Last week showed unusual negative positioning, given last week’s market rally; however, this week is more aligned with the market, with risk-on exposures across the beta and crowding factors.
• The portfolio had heavy tilts away from value and quality and towards growth. Most value and quality factors were in the bottom quartile of YTD exposures, while growth in the Barra model was in the top quartile.
• Interest rate and oil-sensitive assets saw downward pressure this week, as illustrated by the strong negative exposure to these factors. Oil Beta exposure was in the bottom 10% of YTD exposures.

• The International portfolio also took on barbell sector positioning, with extreme long exposure to Consumer Discretionary and heavy short exposure to Info Tech and Industrials.
• Consumer Discretionary exposure, driven by Automobiles, was in the 94th percentile of YTD allocation to the sector.
• Financials and Industrials saw major rotations from last week, moving from an astonishing 30% and 25% allocations to 7% and -11%, respectively.
• Not shown in the table above, 68% of the portfolio was allocated to China, an all-time high.

• The International portfolio showed heavy tilts towards residual volatility, with exposure to these factors in the top 10% of YTD exposures. Interestingly, beta was exposed in the opposite direction this week.
• The portfolio held favorable positioning to value-driven stocks, though this didn't necessarily translate to high-quality stocks. Exposure to Value and Earnings Yield in the Axioma models was at the 88th and 90th percentiles, respectively.
• Highly crowded longs and shorts in the international markets saw extreme downward pressure this week, as shown by the lowest YTD exposure to Short Interest and bottom decile YTD exposure to HF Crowding.

Regards,
Alyx