Energy And Macro Drive Markets into A Short-Lived Rally

Over the past several months, we've introduced Extreme Movers, the latest tool in our arsenal to understand what is driving markets from week to week. We also debuted an international version of the Extreme Movers portfolio to help investors compare fluctuating alpha opportunities and factor-driven dynamics between the US and the world. The Extreme Movers portfolios allow us to apply hindsight to the prior week's momentum to understand the following key questions better:

1. Was the preceding week an alpha-driven or factor-driven week?
2. What are the factor characteristics of the stocks that drove the market?

The Extreme Movers portfolios are weekly-rebalanced, market-neutral portfolios that consist of the top decile of stocks from the Russell 1000 and the MSCI ACWI ex-US, respectively, based on performance on the long side and the bottom decile on the short side. You can find additional information on the construction of the Extreme Movers portfolio in the May 22 edition of Factor Spotlight.

‍US Market Summary and Extreme Movers Metrics

US Market: 09/30/22 - 10/06/22

• There was some hope this week as markets showed signs of a rebound. The Nasdaq led the way with a return of 3.13% for the five days ending October 6. The S&P 500 came in at 2.86%, while the Dow Jones was not far behind at 2.40%.
• Despite the upbeat mood early in the week, at the time of writing, the markets were showing signs of tumult as the release of the US jobs report on Friday exacerbated worries over the continuation of additional rate hikes.
• Oil prices started back on the rise, fueled by supply cuts from OPEC+ announced earlier this week. The production cut of 2 million barrels is the largest since Covid-related supply cuts in 2020.

Extreme Movers Portfolio Performance

Please note that the portfolio's return will always be positive by constructing a portfolio that is long the top movers and short the bottom movers in an index. That said, there are several areas we want to observe around weekly performance:

1. Is the weekly performance below or above the recent median weekly performance? Above the recent median means that the Extreme Movers portfolios had much higher dispersion than a typical week, most likely driven by higher factor volatility.
2. Is the weekly alpha contribution below or above the recent median alpha contribution? Above the recent median demonstrates that the significant market moves were more alpha-driven than in a typical week. Below the median, the market moves were more factor-driven than in a typical week.

• The US Extreme Movers portfolio saw a performance upswing this week with an above-median return of 18.3%.
• The portfolio saw one of the most considerable industry returns of the entire year this week, with a contribution of 28%. A significant overweight largely drove the industry performance to Energy and similarly substantial underweight to Utilities.
• Alpha and style performance were relatively muted this week. Long exposures to Volatility, Earnings Yield, and Oil Beta drove the style performance of the portfolio.

• The International Extreme movers portfolio ticked down this week, posting a performance of 17.5%.
• Industries saw the most considerable contribution all year at 17.2% of the overall return. Long Oil & Gas and Metals & Mining positions drove the industry returns.
• Alpha's performance was above the YTD median with a 68% contribution.

Extreme Movers Portfolio Exposure

Looking at the Extreme Movers from an exposure lens helps us decompose the individual styles and sectors associated with the portfolio's factor-driven performance and better understand broader patterns such as risk-on / risk-off or sector rotation.

• The US portfolio saw extreme long exposure to Energy, driven by Oil & Gas, and a similarly sizeable short exposure to Utilities, driven by Electric Utilities.
• Real Estate and Consumers were strong short positions this week, a complete reversal for Consumer Discretionary, the second largest long position last week.
• Financials also had a strong reversal this week, coming in as the third largest long sector position after being the most prominent short sector last week.

• Beta and macro factors were the major themes this week. The portfolio held significant long exposures to Beta, Volatility, Interest Rate Beta, and Oil Beta. Oil Beta, in particular, hit a near-YTD high exposure this week, driven almost entirely by the long position in Energy.
• Investors appeared to embrace GARP-style securities with favorable growth and earnings characteristics, as evidenced by long exposures to both Growth and Earnings Yield.
• Long exposure to HF Crowding and short exposure to Short Interest showed that markets were kind to both long and short-crowded names this week.

• The International Extreme Movers portfolio held similar sector exposures to its US counterpart, including overexposures to Materials, Energy, and Info Tech and underexposures to Consumer Staples and Utilities.
• Consumer Staples showed the largest reversal, going from the largest long position last week to the largest short position this week. This reversal was split evenly across industries within the sector.
• The portfolio had relatively muted country exposures compared to prior weeks. However, there were meaningful overexposures to Brazil and underexposures to China.

• The International Extreme Movers portfolio showed a similar overexposure to beta and macro-sensitive assets.
• Like the US counterpart, Growth and Earnings Yield were both in favor this week, with substantial overexposures in the portfolio.
• In a deviation from the US portfolio, the International portfolio saw downward pressure on long crowded names, as illustrated by the short exposure to HF Crowding.

Regards,
Alyx