Alpha Surges Back to the Forefront

Over the past several weeks, 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: 07/22/22 - 07/28/22

• Despite a slow start, all three indices saw a mid-week rally that resulted in positive performance for the five days ending July 28. The S&P 500 led the pack with a 1.8% return. The Dow was close behind at 1.5%, followed by the Nasdaq at 0.9%.
• The market reacted with significant positive sentiment on the back of the Fed's decision to raise US rates by 75 bps. Despite US Real GDP shrinking for two consecutive quarters, Fed Chair Jerome Powell shot down concerns surrounding a US recession, citing that we haven't yet seen a broad-based decline across industries.
• Commodity supply chain woes continue, with the latest blow coming on the back of a statement from Gazprom that they are reducing natural gas exports to Germany to 20% of capacity.
• Earnings season remains mixed, with some headline names such as Amazon, Chevron, and Etsy posting positive results while other prominent names such as Meta and Intel showed disappointing results.

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 lower weekly performance than last week, with a return of 17.5%. Its return was just under the year-to-date median weekly return of 17.9%.
• In a drastic shift from last week, alpha drove two-thirds of the portfolio return.The remainder was split somewhat evenly between style and industry contribution.

• The International Extreme Movers portfolio saw a weekly return that struggled relative to earlier in the year. While this week's return of 14% was an improvement from last week, it was still the second lowest weekly return on a year-to-date basis.
• Similar to the US counterpart, the portfolio was heavily driven by alpha, with an alpha contribution of 77%. This week was among the alpha-driven weeks of the year, with only the week of February 16 seeing a slightly higher alpha contribution.

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.

• This week saw significant shifts in sector winners and losers relative to last week. Information Technology, which drove last week's beta rally, had downward pressure, bringing it to the third largest underweight in the US Extreme Movers portfolio.
• Consumer Discretionary and Communication Services saw similar falls from grace and were considerably underweight this week.
• Health Care, Utilities, and Consumer Staples were overweighted in the portfolio this week, a significant pivot from the large underweights from last week.

• Style factors also showed major shifts relative to last week. While Beta & Volatility across models were in favor last week, this week shows that these factors fell out of favor.
• Value and quality factors saw mixed results this week, with investors rewarding high earners and highly profitable companies while simultaneously tilting away from names with high book-to-price.
• Oil Beta exposure showed up strong in the portfolio this week, likely due to ongoing supply chain issues and oil price volatility.
• On the crowding front, Short Interest & ETF Flow saw material drag this week, driven by strong negative sector exposures for Short Interest in Consumer, Industrials, and Healthcare, and ETF Flow in Information Technology, Healthcare, and Energy.

• This week's International Extreme Movers portfolio also saw some major sector shifts. Consumer Discretionary fell heavily out of favor to become the most significant sector underweight in the portfolio, while Financials moved into favor to become the largest overweight.
• Consumer Staples and Utilities had similar moves to that of the US counterpart, moving from moderate underweight to overweight.

• Beta & Volatility internationally had similar downward pressures as the US portfolio, falling to become moderate underweights.
• Value and quality factors were generally out of favor in the international portfolio as the value rotation continued to stall. Interestingly, Growth in the Axioma model also showed slight underweight in the portfolio.

Regards,
Alyx