Challenges Abound for Regional Banks in a Shifting Macro Landscape

Market Summary

US Market: 4/28/2023 - 5/4/2023

• All major indices took a downturn this week, with the Dow finishing the week at -2.06%. The S&P 500 and Nasdaq followed at -1.79% and -1.45%, respectively.
• The FED announced a new rate hike of 25bps this past Wednesday. This announcement came without the previously recurring language of FOMC speeches suggesting more hikes are likely in the future, and instead, Jerome Powell remained silent about the subject. US markets dropped 76bps following the announcement.
• Banks continue to be the main drivers of the macroeconomic landscape, with Regional Banks this week taking the biggest hits across the board. PacWest, an LA-based regional banking holding company, had headwinds of over 50% with multiple halts in trading, while many others finished the week in negative double digits returns.

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 posted a return of 23.1%, which positions it at the 92nd percentile ITD (2007), well above the historical median of 12.6%.
• This week’s factor performance of 18.9% indicates an “Alpha-Driven” week, suggesting that earnings season is starting to result in more idiosyncratic stock returns rather than recent macro-dominated volatility.
• This marks the first week since November 2021 that the portfolio has been both “Very Volatile” and at least “Alpha-Driven”. Environments in which stock prices are moving significantly and are not overly influenced by systematic factors are ripe for fundamental stock-pickers.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers portfolio deviates significantly from its US counterpart this week, landing in “Calm” territory. Industrials was the most volatile sector, along with Energy.
• Like in the US portfolio, alpha led most of the International portfolio performance, categorizing this week as “Alpha-Driven”. Factors only accounted for 21.8% of the performance, which corresponds to the 21st percentile, below the historical median of 27.2%.

US Extreme Movers Portfolio Exposures

• Amid the regional banking crisis, recession fears, and debt ceiling concerns, Financials were hit hard this week. 18% of the 28% short allocation to the Financials Sector was attributable to Banks. The Financials allocation fell in the 3rd percentile since inception and the 4th percentile on a trailing-twelve-month basis.
• Industrials saw its largest long allocation since the inception of the Extreme Movers portfolios (2007). The 26% long allocation was made up largely of Machinery and Ground Transportation stocks.
• Software dominated the short allocation to Information Technology; a result of economic pessimism and May’s 25 basis point rate hike.

• Style factors showed a flight to quality and a strong aversion to interest rate-sensitive stocks which, again, were heavily driven by the short allocations to Banks and Software.
• The downturn in Financials took value factors down with it, but investors weren’t turning their attention to growth factors. The fear-driven move away from Software and Oil, Gas, & Consumable Fuels held growth factors in negative territory again this week.
• The aversion to residual volatility factors persisted, but beta factors rebounded slightly, in large part due to strong performance in the Consumer Discretionary sector.
• Short Interest moved into positive territory this week which indicates that popular hedge fund shorts rallied, causing potential headaches for managers.

International Extreme Movers Portfolio Exposures

• Sector allocations were much more muted in the International portfolio than they were in the US portfolio this week, with no sector exceeding a 10% allocation.
• Japanese stocks led the 9% long allocation to Industrials which landed the sector in its 88th percentile since inception. Like in the US, Machinery was responsible for much of the positioning.
• Oil, Gas, & Consumable Fuels stocks in Canada drove almost a third of the short allocation to the Energy sector. Brazil and the UK were also moderate contributors.

• Style factor exposures were fairly quiet in the International portfolio this week as well, and few style factors showed positive performance.
• Long allocations to Materials, Consumer Discretionary, and Industrials drove a slight rally in beta factors that were heavily concentrated in Japanese stocks.
• Investors moved into stocks with inverse relationships to interest rates and oil and away from stocks with positive relationships. These shifts were most evident in the short allocations to Energy and Financials.

Regards,
David