Energy Continues to Rebound With Economic Uncertainty Ahead

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.

We'd also like to note that Factor Spotlight will not be published next week and would like to wish you and your familiies a happy and relaxing Labor Day weekend.

US Market Summary and Extreme Movers Metrics

US Market: 08/19/22 - 08/25/22

• Markets struggled this week despite solid trading sessions on Wednesday and Thursday. The Nasdaq declined by 2.5%, while the Dow and S&P were neck-and-neck at -2.1% and -2.0%, respectively.
• The market took its harshest hit on Friday in response to news from the annual economic symposium in Jackson Hole. In his speech, Chairman Powell noted that despite "unfortunate costs," the Fed will continue to be aggressive in fighting inflation, but that fight will take time and bring "some pain to households and businesses."
• Investors are looking ahead to key economic releases, namely the August jobs report next Friday and the August CPI report on Sept 13th, which will heavily influence Fed action.

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.

• This week, the US market showed greater dispersion, rebounding to a level just shy of its year-to-date median weekly return of 17.9%.
• Alpha contribution decreased again this week, indicating an increasingly factor-driven market split reasonably evenly between style and industry factors.
• Beta, Momentum, and Oil factors were the key style drivers, while Retail and Energy E&P led the charge from an industry standpoint.

• The international portfolio experienced a much more subtle upward tick in performance at 16.3% this week, below its year-to-date median return of 17.9%.
• Alpha contribution to return sat at 68%, a level maintained for three straight weeks.
• This week the international portfolio saw the factor contribution mix change as country, and currency factors took a back seat to style and industry. These were much more concentrated than their US counterparts in Momentum and Energy factors.

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.

• This week's most notable sector realignments showed up in Consumer Discretionary and Health Care. Discretionary went from the largest long allocation to the most significant short, driven heavily by Retail.
• This week's most significant long allocation was in Energy, where Oil, Gas, & Consumable Fuels accounted for a 32% net long position.

• Style exposures were generally consistent week-over-week. The US portfolio was still low beta and long value and quality factors.
• Despite a strong value posture, the portfolio was not as underexposed to growth factors as last week. That might likely change next week, given the tech-oriented sell-off following the Jackson Hole summit.
• The largest overexposure in the portfolio was to Oil Beta, which aligns with the contribution to return and exposure noted from Energy and Momentum.

• Energy was the clear consistency between the US and international portfolios this week. Oil, Gas, & Consumable Fuels were also the headline here, with a net 25% long allocation.
• Information Technology was the most prominent short position due almost entirely to an 11% bet against Software.
• Consumer Discretionary, the biggest underweight in the US, was much flatter in the international portfolio as Retail names saw much less drag outside the US.

• Though the exposures were more muted from a magnitude perspective, the international portfolio generally mimicked the same fundamental themes we saw in the US.
• The portfolio was anti-beta and long value and quality factors this week but showed stronger underweight to growth factors.
• Oil Beta, as expected, was the largest overexposure in the international portfolio, given the large allocation to Energy stocks.
• From a crowding perspective, things quieted down a bit as the portfolio was only slightly long popular long stocks and slightly short popular shorts. This hints that there likely weren't significant systematic crowding pressures working against hedge fund managers invested outside the US.

Regards,
Kevin