Cautious Pessimism Among Investors Ahead of Inflation Data

Market Summary

US Market: 5/24/2024 - 5/30/2024

• Major US indices showed weak performance this week. In the four trading days through Thursday, the Nasdaq saw a marginal gain of 0.01%. Conversely, the S&P 500 recorded a decline, with a return of -0.61%. The Dow Jones Industrial Average fared the worst among the three, posting a significant decline of -2.44%.
• US stocks were down in Friday’s morning session despite a largely as-expected inflation reading. The Personal Consumption Expenditures Price Index (PCE) rose 0.2% in April and 2.8% year-over-year.
• Per a recent study from Goldman Sachs, the “Magnificent 7” currently accounts for about 20.7% of hedge funds’ total US single stock net exposure which is an all-time high, pointing to extreme crowdedness in the AI leadership space.
• On the international front, recent inflation data from France and the Eurozone has come in higher than expected. This has led economists to scale down their projections for interest rate cuts by the European Central Bank. As a result, global bond markets have been affected, with investors anticipating that high interest rates will persist in the near future.

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

• This week, the US Extreme Movers portfolio posted a return of 13.6%, categorizing it as "Neutral." This performance lands in the 58th percentile since the portfolio's inception in 2007.
• Factors contributed by a total of 21.2% of the total performance, placing it in the “Neutral" category. This return ranks in the 41st percentile since the portfolio’s inception.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers portfolio achieved a return of 14.9%, categorizing it as “neutral”. This week's performance landed in the 52nd percentile since the portfolio's inception.
• Factors contributed to 20% of the total returns, earning the "Very Alpha-Driven" classification. This return ranks in the 19th percentile since inception.

US Extreme Movers Portfolio Exposures

• Specialty Retail and Textiles, Apparel, & Luxury Goods drove a strong week for the Consumer Discretionary sector which saw a 10% long allocation. That positioning marked the 82nd percentile on a trailing-twelve-month basis. Consumer Discretionary was by far the largest short allocation last week which was also driven by Specialty Retail.
• Industrials was the most significant short allocation this week at -10%. Professional Services and Machinery accounted for the majority as the sector landed in the 11th percentile over the last twelve months.
• Communication Services reached its 94th percentile on a trailing-twelve-month basis. All industries contributed to that long allocation but Media led the way at 4% of the 9%.

• Beta and volatility factors substantially quieted this week after a week of strong anti-beta sentiment from investors. The most significant exposure came from Axioma’s Market Sensitivity factor at -0.21 which was driven heavily by long allocations to Communication Services and Materials.
• The US portfolio leaned away from lower quality stocks in Health Care and Information Technology. This had the largest impact on Profitability factors which all reached their highest quintiles on both a TTM and ITD basis.
• Wolfe’s HF Crowding showed a strong positive exposure while their Short Interest exposure was very strongly negative which indicates the hedge fund managers felt benefits on both sides of their books as popular bets were working in their favor.

International Extreme Movers Portfolio Exposures

• Semiconductors & Semiconductor Equipment represented the largest long industry allocation in the ex-US portfolio this week, accounting for more than half of Information Technology’s 14% long position. That allocation lands in the 95th percentile since inception.
• Real Estate Management & Development, on the other hand, accounted for 11% of the 12% short allocation to Real Estate; its lowest level in over twelve months. The majority of that allocation was in Asia and Hong Kong made up 6% on its own.
• Health Care remained a significant short this week, driven by Life Sciences Tools & Services which represented more than half of the 8% sector short. The Health Care aversion was geographically diversified but Hong Kong and China were the most significant contributors.

• International investors demonstrated more risk aversion than what was seen in the US as beta and residual volatility factors mostly landed in the bottom quartiles this week. Barra’s Beta factor reached its 18th percentile on a trailing-twelve-month basis due to long allocations in Financials and Energy.
• Barra’s Earnings Quality factor hit the 96th percentile for the TTM with a 0.26 exposure, indicating that investors favored companies with stronger operating fundamentals. Much of the tradeoff took place in Asia as higher Earnings Quality companies were bought in Japan while lower Earnings Quality stocks were sold off in China and South Korea.
• Interest Rate Beta exposure climbed this week, hinting at the fact that investors are aligning with stocks that tend to benefit from elevated interest rate environments.

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 returned to favor this week over Emerging Markets, accounting for a 13% long allocation in the International portfolio.
• The Pacific region was once again the largest contributor to the allocation but, this week, it was the long side of the book. Japanese stocks in Financials and Information Technology made up ~9% of the 10% allocation to the Pacific.
• While Emerging Markets Asia remained positive, Europe, Middle East, & Africa drove the majority of the short allocation to EM. The 3% short allocation to the UAE fell in the 1st percentile since inception.

Regards,
Jose