Beta Sparks a Strong Week in the US Market

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: 07/15/22 - 07/21/22

• All three major indices rebounded strongly this week, led by the Nasdaq, which returned 7.2% in the five trading days ending July 21. The S&P and Dow followed close behind at 5.5% and 4.6%, respectively.
• Despite a strong week, the market slipped on Friday, primarily led by poor earnings from Snapchat, whose stock fell nearly 40% during market hours.
• Next week’s earnings reports from Microsoft, Alphabet, Meta, and Apple will likely dictate the sustainability of this week’s powerful tech rally.
• Another likely steep rate hike from the Fed next week is also top of mind for investors grappling with the current economic outlook and its impact on equity markets.

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 an uptick in performance this week as more dramatic return dispersion circled back into the market. The portfolio returned 19.8%, nearly 2% above its year-to-date median.
• Most notably, this was the third most factor-driven week of 2022 for the portfolio. Style factors contributed 38%, and industry factors contributed 24% of performance. Beta factors alone accounted for an average of 32% across the US risk models we analyzed.
  
  

• Unlike the US version, the International Extreme Movers Portfolio saw by far its lowest performance of the year, returning only 11.2%, well below its year-to-date median of 18.4%.
• Although factors played a more significant role in performance this week, alpha still accounted for 60% of the return. Industry factors were next in line, adding a 17% 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.

• Information Technology drove the beta rally this week, which is why it controlled a 38% long position in the portfolio. Last week, it was the most prominent short position at 22%.
• The biggest counteracting short positions were low beta stocks in Utilities, Consumer Staples, and Health Care. These three sectors have been three of the top five most popular long sectors in the portfolio in 2022.
  

• As expected, by far, the most significant style exposures in the US portfolio this week were Barra US beta factors and the Wolfe US Volatility factor, which accounts for both beta and residual volatility.
• As a byproduct, the portfolio also leaned into growth factors. It moved away from value, specifically Earnings Yield, the highest YTD return style factor across all US risk models analyzed.
• Interest Rate Beta was once again a positive exposure in the portfolio, driven mainly by the underweights in Utilities and Consumer Staples.

• Sector allocations in the International Extreme Movers portfolio showed much less dispersion than its US counterpart again this week. Directionally, they were similar, but the most noteworthy difference was a 14% long position in Industrials in the international version.

• Although to a lesser degree, the international portfolio aligned with the US in its drive into high beta stocks.
• Interestingly, it didn't take the same posture surrounding growth and value. The international portfolio remained overexposed to Earnings Yield and was reasonably neutral to growth.
• Similar to the US version, the International Extreme Movers portfolio pushed further into stocks positively correlated to interest rates in Energy and away from those inversely correlated in Materials.

Factor Surprise

As noted earlier, we have been leveraging our surprise metric methodology to understand the market movements since the publication of the CPI data in early June. We applied the surprise metric on various risk model factor returns and volatility from June 10th through July 13th. This week, we compared those factor surprises to surprise metrics from the release of the June CPI data this month.

• As defined by the Surprise Metrics, the market reversed course this week following the release of June's CPI data but in light of the onset of earnings season.
• The Commodity and Inflation factors both showed positive returns this week, getting back on track following a slight downturn since early June.
• Growth displayed some variety, continuing its upward surprise trend in the US while falling in developed and emerging markets this week.
• From an industry perspective, there was a significant shift in Information Technology and Financials and, more notably, in Semiconductors and Insurance. Insurance showed a +4 standard-deviation downturn this week in global markets, while Semiconductors saw a +2 standard deviation rally.

Regards,
Kevin