Big Tech Soars on Debt Ceiling Resolution

Market Summary

US Market: 5/26/2023 - 6/1/2023

• It was a big week for large-cap tech as the Nasdaq led US headline indices with a return of 3.2% over the five trading days ending June 1st. The S&P and the Dow followed at 1.7% and 0.9%, respectively.
• US Debt Ceiling legislation passed a House vote on Wednesday night to avoid a government default and impose spending restraints until after the 2024 presidential election. Markets responded favorably in Thursday’s trading.
• The US Federal Reserve indicated that interest rates will likely be held constant in June but hikes in the coming months are still very much on the agenda.
• May’s US Jobs report showed 339,000 new non-farm payroll jobs which was well above the 190,000 consensus estimate. The Dow finished up 2.1% on Friday as a result.

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 had a return of 18.7% this week, classifying the week as "Very Volatile". The portfolio’s return fell in the 84th percentile since the beginning of 2007.
• Factors controlled the US market as the portfolio moved into “Very Factor-Driven” territory. Factors’ 40.8% contribution to return landed in the 88th percentile since the beginning of 2007 and was the highest since the Silicon Valley Bank collapse.

International Extreme Movers Volatility and Factor-Driven Speedometers

• International markets were calmer as the ex-US portfolio registered a 15.7% return this week which snuck into a “Volatile” categorization.
• Factors drove 33.7% of the portfolio’s return which marks the international market as “Factor-Driven” for a second consecutive week.

US Extreme Movers Portfolio Exposures

• The US Extreme Movers portfolio saw a record high allocation to Information Technology since the beginning of our measurement period (1/1/2007). Key industries driving the allocation were software and semiconductors.
• Energy (driven by oil & gas) and Materials (driven by chemicals) had the largest negative allocations, both the bottom 10 percent TTM and ITD.

This week’s portfolio’s style exposures were heavily driven by the long tech / short energy & exposures:

• The portfolio showed an unusual split between being strongly positive Beta driven securities, while being short securities with higher excess volatility (Barra Residual Volatility and Axioma Volatility). As a reminder, residual vol is the volatility of a security in excess of its beta to the market. In today’s heavy tech-driven market, the securities that have seen their volatility decouple from the broader market are actually banks and oil & gas companies. This effect was the exact opposite during the 2007-2010 global financial crisis and recovery.
• Tech drove positive growth exposures, while energy and financials drove negative value exposures.
• Financials and Energy drove the heavy shorts in interest rate beta and oil beta.
• Crowding metrics were fairly muted in the US this week.

International Extreme Movers Portfolio Exposures

• As seen in its US counterpart, the International Extreme Movers Portfolio saw the same record positive positioning to Information Technology and strong negative positioning to Energy.
• Ex-US Industrials & Financials showed stronger positioning in higher performers than in the US, largely due to Airlines & Banks.

• The portfolio saw far less extreme positioning in the Style factors, showing slight negative positioning almost across most measures of risk.
• The outlier positive style exposure came from Axioma Profitability, which largely came from being positive Taiwan & Japanese Semiconductor names & negative global Entertainment companies.
• Similar to the US portfolio, the Oil Beta exposure was strongly negative, but the Interest Rate beta was more muted.

International Extreme Movers Portfolio Country Exposures

The chart presents the portfolio's exposures to various groups in the Developed and Emerging Markets, highlighting the three most notable country contributors for each respective group's allocation.

• Developed markets continued to see a short allocation for another week, driven by Europe (in particular Netherlands).
• Emerging Markets continued to see a long allocation for another week as well, driven by record allocations to India, Taiwan, and Turkey.
• Turkey in particular is an interesting case: the Lira plunged following Erdogan’s victory as investors expressed concerned about the domestic economy. In contrast, the stock market, driven by net exporters, rallied as a weaker currency will likely stimulate their revenues.

Regards,
Kevin