Alpha Is Back Amidst an Unusual Risk-Off

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: 10/14/2022 - 10/20/2022

• Market performance was mixed this week, with a positive earnings surprise offset by continued worry about interest rates and the macro environment. For the five days ending October 20, the Dow Jones eked out a 0.98% return, while the Nasdaq and S&P 500 fell short at -0.32% and -0.11%, respectively.
• SNAP posted disappointing earnings on Thursday, citing a slump in demand for digital ad revenue as a significant headwind. The stock declined by almost 30% and caused a $35 million sell-off across the social media industry.
• The macro environment continues to wage war against bonds and equities as 10-year US Treasury yields hit a new high of 4.239%. This new high represents the highest level for yields since 2008.

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 saw a return of 16.9% this week, which comes in just under the YTD median return of 17.6%.
• Alpha return was a significant driver of returns this week, with alpha contribution making up 71% of the overall return.
• Short positions in Specialty Retail and Household Durables on the industry side, along with long exposure to Interest Rate Beta and short exposure to Short Interest on the style side, were top drivers of returns.

• The International Extreme Movers Portfolio saw a return of 19% this week, coming in well above the YTD median return of 17.6%.
• Like its US counterpart, the alpha return was a primary driver for the international portfolio and contributed 74% of the overall return. This week was in the top decile of alpha contribution in the entire year.
• On the factor side, country factors were the main driver, contributing close to 12% to the overall return, led by short exposure to Taiwan.

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.

• The range of US sector exposures is much more evenly distributed this week than last week's extreme Information Technology and Consumer Staples allocations.
• The portfolio saw long exposures to Energy and Financials, led by Oil & Gas and Insurance.
• Consumer Discretionary dominated the short side, led by Specialty Retail. Health Care also saw negative allocation and was evenly distributed across all industries within the sector.

• US markets showed strong risk aversion again this week, with the portfolio tilting heavily away from the beta & volatility factors.
• The portfolio had substantial positive exposure to rate-sensitive stocks this week, reflecting investor sentiment around continued rate hikes; this week's exposure was the year's third highest.
• Fundamental exposures were primarily consistent vs. last week, with a continued tilt away from growth and into value and quality names.

• The international portfolio shows long allocations to Health Care, Industrials, and Financials. Banks, in particular, stood out as the top long industry allocation.
• Materials, Real Estate, and Consumer Staples were the top short-sector exposures, with Metals & Mining leading the short industry allocations.
• Short positions in China and Taiwan and long positions in the UK and Germany led the country exposures.

• This week, the international risk-off move took an unusual form, with positive sentiment towards high beta stocks and strong negative sentiment on high residual volatility stocks.
• Value and growth in the international portfolio looked similar to the US counterpart, with substantial positive exposures to the value factors, led heavily by the long allocation Financials, and negative exposures to growth.
• Though not as strong as the trend in the US portfolio, interest rate-sensitive stocks continued to see positive exposure in the international portfolio, led heavily by the long Financials allocation.

Regards,
Alyx