Bond Yields Rise as Rate Cut Expectations Shrink

Market Summary

US Market: 10/18/2024 - 10/24/2024

• US headline indices were mixed this week. The Nasdaq led the way with a return of 1.0% over the five trading days ending Thursday. The S&P 500 came in at -0.06% and the Dow followed at -1.6%.
• The euro is on track for a fourth straight week of losses against the dollar, which would be the longest downturn seen since February. This comes as traders hold growing expectations that the European Central Bank will deliver another half-point interest rate cut in December to combat signs of economic weakness in the euro zone.
• Bond yields have seen a rapid run up as bets on the Federal Reserve cutting rates before year end have eased, with traders now pricing in just 40 bps of cuts for the rest of 2024. This is just half of the 80 bps that investors were pricing in mid-September, as economic data continues to surprise on the upside.
• Tesla shares saw their biggest rally in over a decade on Thursday, rising 22% as it reported better-than-expected earnings indicated that growth expectations of 20-30% next year. The rally puts Tesla’s returns back in the black for 2024.

Extreme Movers Portfolio Performance

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

US Extreme Moves Volatility and Factor-Driven Speedometers

• The US Extreme Mover Portfolio delivered a 13.1% return this week which reached the 27th percentile over the trailing-twelve-months and the 52nd percentile since inception. That return level categorizes this week as “Neutral”.
• Factors contributed 15.1% of the total return which landed in the 20th percentile since inception and is categorized as “Very Alpha-Driven”.
• During earnings season, we typically see that volatility tends to become more alpha-driven rather than factor-driven.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme movers portfolio stayed in “Volatile” territory this week with a return of 17.2%. This return marks the 75th percentile on a trailing-twelve-month basis and the 74th percentile since inception.
• Unlike last week, which was “Very Alpha-Driven”, this week flipped all the way back to “Very Factor-Driven” with an 40.1% factor contribution to return that ranked in the 92nd percentile TTM and 91st percentile since inception.
• Weeks that are both “Volatile” and “Very Factor-Driven” can be challenging for fundamental managers as stocks are seeing large movements that are significantly driven by market forces instead of by idiosyncratic value.

US Extreme Movers Portfolio Exposures

• This week, Financials maintained it’s position as the most represented sector in the portfolio with a 9% allocation. This level ranks in the 77th percentile since inception. ‘Capital Markets’ and ‘Banks’ were the most represented industries each contributing by 4%.
• Communication Services surged to become the second most represented sector, reaching the 84th percentile since inception. All industries within the sector contributed positively to this exposure, except for ‘Media’. ‘Entertainment’ was the primary driver, accounting for 4% of the total.
• Consumer Discretionary experienced a sharp decline this week, dropping from a 3% allocation to -23%, placing it in the 3rd percentile both since inception and over the trailing-twelve months. All industries within the sector contributed to this short allocation, except for ‘Hotels, Restaurants & Leisure’. ‘Household Durables’ was the largest contributor to the short allocation, at -7%.

• In contrast to last week, Beta and Volatility factors fell out of favor. Volatility was notably low in both the Axioma and Wolfe models, with each landing in the lower quintile for trailing-twelve months. Most of this low exposure came from the portfolio’s short book, indicating that investors chose to bet against high-volatility names.
• Value factors were slightly in factor this week, suggesting a shift toward a risk-off stance as investors favored high-value names. The majority of this exposure stemmed from the portfolio's long book.
• Macro factors were also favorable this week, particularly Interest Rates Beta, which reached the 87th percentile in a trailing twelve-month basis. The primary driver of this exposure was the short allocation in the Consumer Discretionary sector.
• Crowding factors were mixed this week, with high exposures in both HF Crowding and ETF Flow. This exposure came from the portfolio’s long book, indicating that investors favored names commonly found in hedge fund long books and with high presence in ETFs. In contrast, Short Interest was notably low, sitting in the 13th percentile for both TTM and ITD, both the long and short books contributed to this low exposure.

International Extreme Movers Portfolio Exposures

• Information Technology emerged as the most represented sector in the international portfolio, holding an 11% allocation. This positioned the sector in the 78th percentile over the trailing-twelve months and the 89th percentile since inception. The ‘Electronic Equipment, Instruments & Components’ industry led within this sector, accounting for 4.52% on its own.
• Consumer Staples ranked as the second most represented industry at 5%, placing it in the 81st percentile for trailing-twelve months. Within this sector, ‘Beverages’ was the most significant industry, accounting for a 3.4% allocation alone.
• Real Estate experienced a significant shift this week, dropping from the second most represented sector to the least, with a -9% allocation that placed it in the 6th percentile for the trailing-twelve months. The decline was primarily driven by the ‘Real Estate Management & Development industry’, which accounted for nearly the entire allocation.

• Unlike the U.S. Portfolio, Beta and Volatility factors were favorable for the International Portfolio. Residual Volatility was notably high, ranking in the 96th percentile for trailing-twelve months and the 97th percentile since inception. This positive exposure was mainly driven by the portfolio's long positions, while the short book contributed negatively, but to a lesser extent. This suggests that investors preferred long positions in stocks with high beta and volatility, while simultaneously shorting other high-beta names.
• Both Growth and Value factors were favorable this week. Axioma’s Growth factor was particularly strong, ranking in the 92nd percentile for the trailing-twelve months, driven primarily by the long book, with some contribution from the short book as well. Dividend Yield for Axioma also performed well, placing in the 85th percentile TTM, with the short book being the main contributor to this exposure.
• Quality factors exhibited mixed performances this week. Barra’s Profitability was high, primarily driven by short allocations to Financials and Real Estate sectors. In contrast, Axioma’s Profitability was low, with negative contributions stemming from the short allocation to the Real Estate sector. Additionally, Investment Quality was low, largely due to the long book, indicating that investors favored low-quality names in their long book.

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.

• Emerging Markets were favored this week, with a 29% allocation that positioned it in the 84th percentile for trailing-twelve months and the 85th percentile since inception. In contrast, Developed Markets experienced a -30% allocation, placing it in the 13th percentile for the trailing-twelve months and the 11th percentile since inception.
• Within Emerging Markets, Asia was the most represented region, accounting for 35% of the allocation. China emerged as the leading country in this region, accounting for 56% of the total, which represents the 99th percentile since the portfolio's inception.
• In Developed Markets, the Pacific region was the most significant, with a -31% representation. Japan was the primary driver of this decline, accounting for -30%, which placed it in the 3rd percentile for the trailing-twelve months and the 8th percentile since inception.

Regards,

Jose