Cooling Markets Make Room for Rate Cut Expectations

Market Summary

US Market: 3/8/2024 - 3/14/2024

• US headline indices posted mixed returns this week, as the only one in the green was the Dow, with a weekly return of 0.29%. The S&P return was slightly negative, at -0.13%, followed by the Nasdaq at -1.55%.
• On Monday, gold prices reached an all-time high, while Bitcoin reached the same milestone on Wednesday. Oil prices continue to increase at a steady state, up more than 15% since the beginning of the year.
• Many analysts warn about possible rate cuts given flashing signs of a pending US recession, despite a maintained high consumer spending. Some of these signs include an inverted 2-10 yield curve, a forecast of near-to-zero GDP Growth in the second quarter, and reduced bank lending.

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 returned 15.2%, which is close to the mean on a trailing-twelve-months (TTM) basis, at the 51st percentile, and in the fourth quintile on an inception-to-date (ITD) basis, at the 68th percentile. This ITD percentile categorizes the week as “Volatile”.
• Factors contributed to only 15.41% of the total volatility, classifying the week as “Alpha-Driven”, at the 21st percentile ITD. Style factors accounted for 61% of the factor contribution, with industry factors making up the remaining 39%.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers Portfolio had a week classified as “Very Volatile”, as the 19.0% weekly return represents the 96th percentile TTM and 83rd percentile ITD.
• Factors were responsible for 33.4% of the total return, categorizing this week as “Factor-Driven”. Country factors by themselves accounted for three-quarters of the factor contribution to volatility, followed by style, industry, and currency at 14%, 9%, and 3% respectively.

US Extreme Movers Portfolio Exposures

• Materials emerged as the dominant allocation this week, surging close to its trailing twelve months high at the 96th percentile. Within the sector, Chemicals accounted for 4% of the total allocation, closely followed by Containers and Packaging at 3%.
• Communications witnessed a substantial increase in allocation this week, transitioning from a -14% allocation to a 6% allocation and landing in the top quintile for the trailing twelve months. The long section of the portfolio contributed to this allocation with 8%, while the short section accounted for -2%.
• Information technology experienced a remarkable shift from being the largest allocation last week to the smallest one this week, plummeting to -17% and landing in the bottom quintile in Inception to Date (ITD) performance. Semiconductors comprised -10% of the total allocation, followed by computer electronics at -5%.

• Value remained a strong focus this week, with the majority of factors landing in the top quartile ITD. This trend was observed in both the long and short sides of the portfolio, suggesting that investors were betting against low-value names while favoring high-value ones. Earnings Yield, in particular, stood out by landing in the top decile ITD across all three models, with much of the contribution stemming from the short side of the portfolio.
• Beta and volatility factors maintained a neutral stance this week, as most factors clustered around the 50th percentile. Beta exhibited a notably low exposure of -0.27, positioning it in the 31st percentile TTM. This negative Beta was predominantly influenced by activity in the short book, suggesting that investors were selling high-beta names.
• This week, the majority of crowding factors showed positive trends. HF crowding surged into the top decile in TTM largely due to increased activity in its long positions, suggesting investors favored crowded names. Conversely, Short Interest saw a decline, with both long and short positions contributing to this diminished exposure.

International Extreme Movers Portfolio Exposures

• Materials represented the largest allocation this week at 8% landing in the 87th percentile for TTM. Almost all this representation came from Metals & Mining which contributed 8% alone.
• Healthcare landed in the top decile this week with a 7% allocation. Biotech and Pharmaceuticals were the most represented industries, both contributing by 2.75%. On the other hand, Healthcare technology saw a -0.55% allocation this week.
• Industrials was the least represented industry at -8%, landing in the 7th percentile TTM. This negative allocation primarily came from the short section of the portfolio.

• There was a notable shift in Beta and Volatility this week, as all Beta and Volatility factors exhibited positive exposures. Beta, in particular, landed in the 92nd percentile, with the majority of this exposure coming from the short book. This suggests that investors were selling low beta names, signaling a shift in market sentiment towards higher volatility assets.
• The majority of value factors experienced negative exposures this week. Both Dividend Yield and Earnings Yield showed negative trends, with contributions from both the long and short books. However, Value (Axioma) stood out with a notably positive exposure, landing in the 88th percentile for the trailing twelve months. This positive exposure was primarily driven by the long book, indicating investors bough high value names.
• Quality indicators presented a mixed picture this week. Profitability showed contrasting allocations, with a positive allocation for Barra but a notably negative one for Axioma, landing in the 6th percentile for the trailing twelve months (TTM). This negative allocation was primarily driven by the short book. Meanwhile, Investment Quality exhibited a starkly negative trend, landing in the 2nd percentile TTM. This negative exposure predominantly stemmed from the long book, suggesting that investors bought names with low exposure to Investment Quality.

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.

• The International Extreme Movers portfolio demonstrated a tilt towards emerging markets, with a 9% allocation, representing the 61st percentile ITD. Conversely, developed markets witnessed a -9% allocation, placing them in the 31st percentile ITD.
• Within the Emerging Markets, Asia made the most substantial contribution to the allocation at 5%, primarily driven by China at 26%. The Americas followed as the second-highest contributing region, accounting for 3%, with Chile leading at 3%.
• The negative allocation within the Emerging Markets segment was primarily influenced by the Pacific region at -18%, notably led by Japan at -21%. In contrast, Europe & the Middle East boasted a 7% allocation, with Germany and Switzerland leading the pack at 4% and 3%, respectively.

Regards,
Reshma