Equities Rebound on Positive Economic Outlook

US Market Concentration

The US market has become increasingly dominated in the “Magnificent Seven”. In 2023, large cap stocks, particularly in Tech, dictated market trends and investor demand. This dominance, though more pronounced than ever, is not a breaking development. The level of market competition began a decline in 2014 before steeply falling off in 2019 and 2020. To illustrate just how concentrated the market has become, we calculated the “effective number of stocks” using the Herfindahl-Hirschman Index for both the S&P 500 and the Russell 3000 indices since 2007.

What we found was that, in June of 2014, the Russell 3000 had an “effective number” of 232 stocks while the S&P 500 stood at 151. This indicates that the indices, due to the weights of their underlying constituents, behaved like markets of 232 and 151 companies, respectively. In May of 2019, the figure for the Russell 3000 was 167 and the figure for the S&P 500 was 118. As of the end of 2023, the effective numbers have decreased all the way to 82 and 61. What this means for investors is that the concentration in large cap influences market dynamics almost four times as much as in 2014 and twice as high as in 2019. In other words, factor forces in the market that used to be a result of a broader collection of stocks can now be sparked and driven by a much smaller handful.

Market Summary

US Market: 1/19/2024 - 1/25/2024

• US headline indices saw strong returns this week. The Nasdaq topped the group at 3.0% while the S&P and the Dow followed at 2.4% and 1.6%, respectively.
• US GDP increased by an annualized 3.3% in the fourth quarter, which was well ahead of the 2% market consensus, indicating stronger than expected economic growth. That 3.3% figure follows Q3’s 4.9% annualized growth.
• The Personal Consumption Expenditures index increased by 0.2% in December and 2.9% over the prior year which was generally in line with street expectations but demonstrated a decline from November’s 3.2% annual rate.

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 remained in “Volatile” territory for the fourth straight week, notching a return of 14.5% which landed in the 65th percentile since inception.
• Factor contribution, while lower than last week, was still very elevated in the US. The 36.4% contribution to return marked the 83rd percentile since inception and is categorized as “Very Factor-Driven”.
• Markets that are classified as both “Volatile” and “Very Factor-Driven” tend to be very challenging weeks for fundamental managers, given that stock prices are moving dramatically as a result of common market forces rather than stock-specific reasons.

International Extreme Movers Volatility and Factor-Driven Speedometers

• Ex-US volatility declined this week as the International Extreme Movers portfolio’s return clocked in at 14.9%. That return falls in the 52nd percentile since inception and is therefore categorized as “Neutral”.
• Factor contribution also dropped considerably this week. Factors accounted for 20.5% of the portfolio’s return which lands in the 21st percentile since inception and is categorized as an “Alpha-Driven” week.

US Extreme Movers Portfolio Exposures

• Information Technology defended its spot as the top sector this week with a 37% allocation that landed in the top decile over the trailing twelve month (TTM) and since inception (ITD) periods. All industries within the sector had a long allocation, with Semiconductors alone accounting for over half of the total allocation.
• Communication Services also landed in the top decile on a TTM and ITD basis with a 9% allocation. This was led primarily by the Entertainment industry at 5%.
• Utilities was this week’s bottom sector at -25%, which is the lowest allocation that’s been seen over the trailing twelve months. Electric Utilities was the main driver at -12%, though all other industries were short as well.
• Consumer Staples and Real Estate also saw particularly low allocations this week, both landing in the bottom deciles TTM and ITD. Consumer Staples was driven overwhelmingly by Consumer Staples Distribution & Retails and Food Products. Real Estate was driven by Retail and Residential REITs.

• The U.S. portfolio exhibited risk-on characteristics this week, with a flip to high beta and volatility exposures. Most factors ranked in the top quintile TTM. This was driven largely by the long book, which indicates that investors preferred to buy volatile names and avoided more stable names.
• Value turned negative across all factors. Dividend Yield was driven by both sides of the book, suggesting that investors both bought low dividend yields and sold high dividend yield names. Growth on the other hand was only mildly positive this week and driven by the short book, suggesting that investors sold low-growth names.
• Interest Rate Beta and Oil Beta were both positive. Investors bought stocks with a positive relationship to interest rates and sold those with an inverse relationship. They also sold stocks with a negative relation to oil prices.
• Hedge Fund Crowding and Short Interest were both mildly positive as well, landing in the third quartile ITD. Both factors were driven by the long book.

International Extreme Movers Portfolio Exposures

• In similar fashion to the US portfolio, Information Technology and Financials saw the largest representations in this week’s International Extreme Movers portfolio, with Tech landing in the top decile TTM and ITD. Semiconductors drove the Tech sector at almost 10%, while Capital Markets drove Financials at 4%.
• Materials recovered from last week’s -13% weight, landing in the 50th percentile ITD. While Chemicals continued to see a strong negative allocation, Metals & Mining pulled the sector back with a positive 7% weight.
• Consumer Staples was the bottom sector at -11%, over half of which was driven by Food Products. This placed in the lowest decile both TTM and ITD.

• The international portfolio continued to be slightly anti-vol this week, however beta exposures turned significantly positive, landing in the 89th percentile TTM. Beta exposures were driven by short positions, indicating that investors largely sold anti-beta names.
• Growth positioning was neutral, while Value pushed further positive across all factors. The Value factor was driven almost entirely by the long book, while Dividend Yield and Earnings Yield were both driven by the short book, suggesting that investors looked for strong book values, while shorting names with low dividend and earnings yields.
• Interest Rate Beta saw a big swing, with a negative exposure that landed in the bottom percentile TTM. The negative exposure came from both sides of the book, implying that investor favored securities with negative relationships to interest rates while trimming names with positive relationships to rates.
• The portfolio had negative HF Crowding exposure and positive Short Interest exposure, both driven by longs. This suggests that investors bought into less-popular longs, while also buying names with low short interest.

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.

• Developed Markets continued to outweigh Emerging Markets with a 19% long allocation this week. DM landed in the 70th percentile while EM remained in the 19th percentile on a trailing twelve month basis.
• The Europe & Middle East region drove the Developed Markets, with Germany having a 4% allocation that landed in the top quintile TTM and ITD. Allocation to Japan dropped significantly from last week’s high, reaching only 3%.
• Asia continued to drive the Emerging Markets, with China accounting for a -6% allocation. India and Indonesia both saw similar negative allocations, which landed them each in the bottom percentile TTM and ITD. EMEA, on the other hand, was the only positive region in the Emerging Markets, led by a 5% allocation to South Africa that placed in the top quintile since inception.

Regards,
Reshma