Earnings Alpha Overshadows Fitch Downgrade

Market Summary

US Market: 7/28/2023 - 8/3/2023

• US headline indices rallied through Tuesday before sliding to finish the 5-day period ending August 3rd. The S&P 500 ended lowest at -0.8%. The Nasdaq followed at -0.6%, and the Dow finished at -0.2%.
• Fitch Ratings downgraded the US government from a AAA to an AA+ rating citing the growing debt burden and the “expected fiscal deterioration over the next three years”. The Nasdaq fell -220 bps during Wednesday’s trading session following the news.
• Hotly anticipated big tech earnings were mixed this week. Apple beat consensus EPS estimates, but revenue came in 1% lower than last year. On the call, Apple noted that it is expecting revenue to decline in Q3, which sent the stock down ~2% after hours on Thursday. Amazon saw its biggest earnings beat since 2020 ($0.65 vs. consensus $0.35). Amazon stock climbed more than 10% after hours on Thursday.

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 reached its highest quintile of return this week at 18.6%. This level of volatility marked the 84th percentile of weekly returns since 2007.
• Factor contribution to return fell all the way to just 5.4%, which puts alpha contribution at its 97th percentile since 2007.
• Markets that are categorized as both “Very Volatile” and “Very Alpha-Driven” provide the best conditions for fundamental investors, given the fact that stock prices are moving significantly and the reasons for those movements are idiosyncratic in nature rather than factor-driven.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International portfolio was directionally similar to its US counterpart but to a lesser degree. The International Extreme Movers portfolio returned 17.4% which landed in “Volatile” territory relative to its own history.
• 23% of the portfolio’s return was driven by common factors which landed in the 31st percentile since 2007. That places this week in the “Alpha-Driven” category.

US Extreme Movers Portfolio Exposures

• This week the US portfolio saw moderate allocations on both sides of the book. Industrials led the way at a 6% allocation that was dominated by Building Products and Machinery.
• Communication Services was not far behind with a 5% allocation that came in just shy of the top quintile in the Trailing Twelve Months (TTM). This position was driven almost exclusively by Media.
• Health Care took the biggest hit at -8%, which placed it in the bottom quartile since inception. While all industries were down except Health Care Providers and Services, the sector was primarily driven by the -8% position in Health Care Equipment & Supplies.
• Information Technology recovered from a severely negative allocation last week, landing in neutral territory with a 4% long allocation. All industries except Electronic Equipment, Instruments, & Components, with Semiconductors leading the way at 3%.

• The portfolio remained negative Growth on both sides of the book, with investors taking long positions in anti-growth names and short positions in growth-behaving ones. The positive Value tilt also persisted, though only on the short side of the portfolio. This indicates that investors took short positions in anti-value names.
• Interest Rate Beta’s positive allocation was entirely driven by the short book, indicating that investors were against stocks that are negatively correlated to rising interest rates. Oil Beta was also positive, driven by a similar short allocation to stocks that move negatively with rising oil prices.
• Hedge Fund Crowding and Short Interest were both fairly neutral, with negative tilts coming from the short book. This implies that investors were somewhat against popular long positions and popular shorts.
• Beta and Volatility factors also drifted into neutral territory, mostly ending with slightly positive exposures.

International Extreme Movers Portfolio Exposures

• The International portfolio deviated considerably from the US portfolio this week, with Consumer Discretionary leading the way at 7%. Over half of this allocation was driven by Automobiles, particularly in Hong Kong.
• Information Technology shifted from being the most negative allocation last week to the second highest this week. Recovering from last week, Semiconductors & Semiconductor Equipment were responsible for over half of this allocation.
• Metals and Mining also reversed course from last week, driving the -9% allocation to Materials that landed it in the 14th percentile TTM.
• Communication Services also placed low this week, reaching the 9th percentile since inception. The -3% allocation was dragged down primarily by Diversified and Wireless Telecommunications Services.

• Beta and Volatility continued in opposite directions this week, with Volatility exposure still landing in the top decile ITD. Both exposures were driven by the long book, suggesting that investors favored both high-volatility stocks and anti-beta stocks.
• Growth exposures turned negative on both the short and long side, suggesting that investors shorted high-growth names and bought anti-growth names.
• Value leaned more positive than last week, with the exception of Dividend Yield which was less in favor. Earnings Yield in particular was positive on both sides of the book, suggesting that investors bought high-yielding names and shorted low-yielding names.
• Interest Rate Beta shifted to a strong negative exposure that landed just above the bottom quartile TTM. It was driven by the long book, suggesting that investors flocked to names with a negative relationship with rising interest rates. Oil Beta remained positive, suggesting that investors favored positions with a positive relationship to oil prices.
• HF Crowding’s negative exposure was driven entirely by the long book this week, indicating that investors favored uncrowded names. Short Interest’s positive exposure was a reversal from last week, and driven by the short book, indicating that the portfolio contained less popular shorts this week.

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.

• Investors favored Emerging Markets (EM) over Developed Markets (DM) again this week. The DM allocation landed in the bottom decile both TTM and ITD, while the EM allocation landed in the top quintile TTM and top decile ITD.
• The EM allocation was driven by the superconductor-related tech rally in China and Korea, with both countries seeing an allocation well into the top decile ITD. Meanwhile, South Africa and Saudi Arabia both saw some of their lowest allocations, with exposures landing in the bottom decile ITD.
• The DM allocation was dominated by the Europe & Middle East region, as European markets struggled with the US credit downgrade this week. The UK was hit hardest at a -12% allocation that placed in the 4th percentile both TTM and ITD.

Regards,
Reshma