Big Tech Earnings Ease Bank-Led Fears

Market Summary

US Market: 4/21/2023 - 4/27/2023

• Despite mid-week volatility, US headline indices were largely flat through Thursday’s close. The Nasdaq led the way at 0.7%, while the S&P and Dow followed at 0.13% and 0.12%, respectively.
• Bank stocks fell hard on Tuesday following First Republic’s earnings call. First Republic reported its deposits dropped by 41% in Q1, which resulted in a nearly 50% downturn in the stock’s price during Tuesday’s trading session.
• Tech earnings led the market’s recovery on Thursday after strong reports from Meta, Microsoft, and Alphabet. The Nasdaq was up almost 2.5% on Thursday.

Extreme Movers Portfolio Performance

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

US Extreme Movers Volatility and Factor-Driven Speedometers

• The US Extreme Movers portfolio indicated the most volatile week for stocks since mid-March, as the portfolio’s 14.9% return landed in the second quintile since 2007.
• The battle between alpha and factor influence remained in a bit of a stalemate as the factor contribution to the portfolio’s return fell just slightly above its mean. This indicates that systematic market factors and stock-specific events are moving stock prices even during earnings season.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International portfolio also posted its highest return since mid-March but still fell in “Neutral” territory when compared to its historical average.
• Factors, however, were much more dominant outside the US as the portfolio pointed to “Very Factor-Driven” conditions. This means that there is much less idiosyncratic alpha available to fundamental managers due to the fact that macro forces are dictating price movements.
  

US Extreme Movers Portfolio Exposures

• Following an unsettling earnings report from FRC, Banks were once again the biggest detractors from Financials, accounting for two-thirds of the total negative allocation to the sector of -19%. The remaining one-third of the negative impact was attributed to Capital Markets.
• Food Products had a positive allocation of 9%, which was the highest among all industries in the Consumer Staples sector. The Consumer Staples sector as a whole hit its highest allocation since the portfolio’s inception (2007). Other industries within Consumer Staples, including Household Products and Consumer Staples Distribution, had positive allocations of 6%, while Beverages had a slightly lower positive allocation of 3%.
• Health Care saw positive contributions from Health Care Providers, Health Care Equipment, and Pharmaceuticals, while Life Sciences Tools & Services had a negative allocation of -6%. In the Materials sector, Metals & Mining accounted for half of the negative allocation, resulting in the sector landing in the bottom decile ITD for exposure.

• Beta and Volatility factors landed in the bottom quintile ITD for all models. The short book led this contribution, suggesting that investors bet against volatile stocks with a positive relationship with the market.
• Popular shorts declined this week, indicated by the swing from positive to negative exposure for Short Interest. HF Crowding maintained a similar exposure to the week prior.
• The portfolio had a negative exposure to Growth factors coming mostly from the long book, indicating that investors favored less growthy stocks but favored Quality over Value as indicated by neutral Value exposures and Quality exposures that fell in the top quintile ITD.
• Short Interest had very negative exposure, ranking at the 4th percentile ITD. This negative exposure mostly came from the short side of the book, indicating that hedge fund managers likely saw tailwinds from short positions this week.
  

International Extreme Movers Portfolio Exposures

• Similar to its US counterpart, Consumer Staples and Materials had some of the most extreme allocations, while Financials remained relatively neutral at the 59th percentile.
• The allocation to Consumer Staples was led by Beverages, with all other industries making smaller positive contributions. India accounted for one-third of the positive allocation. In general, all geographies except China, Hong Kong, and South Korea had positive contributions.
• Metals & Mining contributed three-quarters of the -15% allocation to Materials, followed by Chemicals at -3%. China, Hong Kong, South Korea, and Australia were the primary contributors to the allocation, with a combined weight of -15%.
• India accounted for 20% of the book, while Hong Kong and China had allocations of -14% and -11.5% respectively.

• The strong negative exposure to Beta came exclusively from the long book, and that Volatility came exclusively from the short book. This implies that investors favored anti-beta names and bet against volatile ones. The exposure to volatility ended up as one of the most negative ITD.
• While Value factors remained relatively neutral, Growth factors saw one of the heaviest underweight exposures since 2007. This exposure came from both sides of the book, indicating that investors favored anti-growth names while fleeing away from growth-oriented ones. Hong Kong, China, and India led this negative contribution.
• Long crowded names helped investors’ books, as the allocation to HF Crowding landed close to the top decile ITD. This exposure came from both sides of the book, suggesting investors favored popular longs and bet against popular shorts. Hong Kong and India led the exposure contributions to crowding.
  

Regards,
David