Earnings Provide Alpha-Driven Volatility for Investors

Market Summary

US Market: 2/23/2024 - 2/29/2024

• US headline indices were little changed this week. The Nasdaq finished the five trading days ending Feb. 29th up 0.31% while the S&P and Dow followed at 0.18% and -0.19%, respectively.
• One of the key Fed inflation measures, the Personal Consumption Expenditure index rose 0.4% in January when excluding food and energy. While that reading fell in line with expectations, it points to challenges in the road ahead for the Fed to get to its 2% inflation target.
• Bitcoin surged to its highest levels since November of 2021. The cryptocurrency was up more than 10% on Wednesday and nearly reached $64,000 before settling down to roughly $62,000 heading into the weekend.

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 saw a return of 19.5% over the week, even greater than last week’s return of 17.7%. This level of volatility sits in the 86th percentile since inception and categorizes the week as “Very Volatile”.
• Factors accounted for 19.2% of the total volatility, 71% of which was attributed to style factors and the remaining 29% to industry factors. This level of factor contribution classifies the week as “Alpha-Driven”, within the bottom tertile since inception.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers Portfolio returns were very close to those seen last week at 14.7%. These levels of volatility landed exactly in the 50th percentile since inception, categorizing the week as “Neutral”.
• Factors accounted for 12.8% of the total return, representing the lowest levels in the past twelve months and the 3rd percentile since inception. Industry and Country combined accounted for 85% of the factor contribution to volatility.
  
  

US Extreme Movers Portfolio Exposures

• Consumer Discretionary landed in the top decile both on a TTM and ITD basis, with Specialty Retail contributing almost half of that sector exposure.
• Information Technology rebounded from last week’s extreme negative allocation, now sitting close to its TTM mean at the 52nd percentile. Software accounted for 7% of the total 8% allocation to the sector.
• Utilities had the most negative allocation this week. The 8% short position landed close to the bottom decile ITD as all its industries contributed to its short exposure.

• Beta and Volatility saw close-to-neutral exposures as most of the indicators landed in the middle quintile both on a TTM and ITD basis. These exposures resulted from the combination of a positive contribution from the longs and negative contribution from the shorts, implying that investors are piling on, and simultaneously selling, names with high beta and high volatility.
• Growth and Value switched places as this week we see the portfolio became long growth and short value. The growth exposure came from both sides of the book, while the value exposure came from the short side only, implying that investors fled away from names with value characteristics, while not necessarily favoring anti-value behaving ones.
• Quality factors landed very close to the historical mean, while Macro factors saw reduced impact compared to last week. HF Crowding and Short Interest landed in positive territory, as the longs and the shorts contributed in opposite directions.

International Extreme Movers Portfolio Exposures

• This week, Industrials led sector exposures as its 9% allocation landed just shy of the top decile ITD, at the 89th percentile. Machinery contributed the most to this positive allocation, at a weight of 6.45%, followed by Aerospace & Defense, and Electrical Equipment. Industrial Conglomerates was the most negative industry allocation within the sector, at a weight of -3.76%.
• Information Technology followed, at a 6% weight. Semiconductors & Semiconductor Equipment contributed the most to this positive allocation with a weight of 5.91%, followed by Software at 4.84%. Electronic Equipment, Instruments & Components had an offsetting allocation of -4.30%.
• Consumer Staples landed close to the bottom decile ITD with a short exposure of -8%. All the industries within the sector contributed negatively to the allocation, led by Beverages and Consumer Staples Distribution & Retail.

• Most indicators within Beta and Volatility landed in positive territory. The short book contributed positively, offset partially by negative contributions from the long book, implying that investors both favored and fled away from low-vol, anti-beta names.
• Value indicators showed slight negative exposures, while Growth landed in the top tertile ITD with contributions from both sides of the book. This implies that investors favored names that exhibit growth characteristics while sold off from anti-growth behaving ones.
• Oil Beta exposures landed close to neutral, while Interest Rate Beta saw positive exposures coming from the long side of the book, implying that investors favored names with a positive relationship to rising rates.

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.

• This week, the International Extreme Movers portfolio was tilted towards Developed Markets, which had a 14% long allocation representing the 66th percentile ITD. Consequently, Emerging Markets saw a short allocation of 16%, placing it in the bottom quartile ITD.
• Within Developed Markets, the Pacific region had the highest contribution to the positive allocation, at 9%, mostly led by Japan at 10% which was offset by a 3% allocation to Singapore. Europe & Middle East also contributed positively, with Germany’s and Israel’s weights of 7% and 3% representing their 94th and 97th percentile ITD, respectively.
• Within Emerging Markets, China did not feature for the first time in months, as Asia contributed the least to EM’s negative allocation. Europe, Middle East & Africa had the strongest short contribution, at -7%, led by South Africa with a weight of -5%. Meanwhile, Americas had a weight of -6%, led by Mexico which landed in the 3rd percentile ITD.

Regards,
David