Banks Lead the US on a Downhill Slope

Written by

David Bromberg

Post On

Mar 12, 2023

Note: Extreme Movers definitions can be found in the Factor University section on our website.

US headline indices had a difficult second half to the week. The Dow fell hardest, losing 2.3% from Friday through Thursday. The S&P and Nasdaq followed at -1.6% and -1.1%, respectively.
In his semi-annual monetary policy address, Federal Reserve Chairman Jerome Powell noted the continued strength of recent inflation data. He clarified that rates could push "higher than previously anticipated" should that trend continue.
On Thursday, bank stocks fell dramatically amidst a Silicon Valley Bank fire sale that drove its shares down more than 60%. On Friday, California state regulators shut down SVB marking the most significant bank failure since the Global Financial Crisis.

Extreme Movers Portfolio Performance

The US Extreme Movers portfolio returned 14.0%, barely landing in "Volatile" territory for the fifth consecutive week.
Factors again quieted slightly this week as the portfolio moved into the "Neutral" category. 24.6% of the portfolio's return was attributable to systematic factors, which landed in the third quintile of weeks since January 2007.
Please note that the Extreme Movers portfolios' performance is calculated from the prior Thursday to Wednesday.

For the third straight week, the International Extreme Movers portfolio pointed to "Alpha-Driven" markets, meaning that systematic macro forces less obstructed the stock-picking landscape.
The portfolio returned 16.2%, placing this week in "Volatile" territory. Weeks with elevated volatility levels and a more significant alpha influence are the preferred conditions for fundamental investors.

Information Technology and Financials were the top stories this week. Information Technology’s 30% long allocation was in the 96th percentile since 2007, and the 42% short allocation to Financials was the most significant in over a year and in the 1st percentile since 2007.
Software contributed half the 30% of Information Technology allocation, followed by Semiconductors and IT Services. Overall, all Industries within Information Technology saw positive allocations.
Financials took a hit this week, with a severe negative allocation that marked its lowest levels on a trailing twelve-month basis. Banks were at the forefront of the downturn, accounting for two-thirds of the negative allocation.

This week, Volatility and Beta exposures rose to positive levels, landing in the top quartile ITD. The positive exposure came exclusively from long positions in high beta and high Volatility stocks, while the short book didn't see significant tilts toward either high or low beta names.
IInterest Rate Beta's extreme negative allocation can be attributed to the sharp negative allocation to the Banks Industry, as banks typically have a positive relationship with rising interest rates.
Growth superseded Value this week, as investors moved heavily into tech stocks and away from Financials.
Long crowded names, especially in Information Technology, caused tailwinds in hedge funds' long allocations. However, their short positions did not cause sharp movements to their book's performance in either direction, as seen in the relatively neutral Short Interest exposure.

As observed in recent weeks, the International Extreme Movers portfolio showed significant differences from its US counterpart. Industrials and Real Estate were the most positive and negative allocations, respectively. At the same time, Information Technology and Financials stayed within their historical mean, falling within the middle three quintiles on a trailing twelve-month and inception-to-date basis.
The outlying long allocation to Industrials was primarily driven by Asian stocks in Japan, South Korea, and China, with all other regions also contributing positively to this allocation. On the other hand, Hong Kong and Singapore played a significant role in the short allocation to Real Estate. These allocations highlight the considerable presence of Asian markets in the current macroeconomic landscape.
Electric Utilities and Renewable Electricity Producers across Brazil and India led the positive allocation to Utilities.

Close-to-neutral exposures across various factor categories, including Beta, Growth, Value, and Macroeconomic factors, evidence international Markets' "Alpha-Driven" nature.
Volatility saw extreme underweight exposures, driven exclusively by the short allocations to most Industries in China and Hong Kong, but mainly Consumer Discretionary and Real Estate.
HF Crowding saw the most prominent positive exposure on a trailing twelve-month basis, driven chiefly by the short allocation to Hong Kong and popular long ideas in Brazil and India.

Regards,
David