Equities Soar on Soft Landing Expectations for 2024

Market Summary

US Market: 12/8/2023 - 12/14/2023

• US headline indices had strong performance across the board this week. The Dow closed at a record-high Thursday, up 3.2% over the trailing week. The Nasdaq tied for the top spot, also at 3.2%, and the S&P followed not far behind at 2.7%.
• The massive equity rally came as the Fed released it’s final policy decision of the year, electing to keep interest rates steady. Along with the decision to keep the current 5.25% - 5.50% target range, the Fed forecasted a soft landing and 3 rate cuts in 2024.
• Following the Fed’s pivot, markets and economists rewrote their 2024 forecasts to price in double the amount of rate cuts implied by Fed officials. In total, markets have priced in 150 bps of reduction next year.
• US retail sales rebounded in November after a decline the month prior. The rise of 0.3% outpaced expectations of a 0.2% increase, pointing to the continued strength of consumer spending this year. Spending increased the most in restaurants, which were up 1.6% for the month, while gasoline saw the largest decline dropping 2.9%.

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 returned 14%, just edging into the “Volatile” classification. This week’s return reached the 60th percentile since inception, but only the 33rd percentile over the trailing twelve month period.
• Factors accounted for 31.9% of this week’s total volatility, classifying the week as “Factor-Driven”, and landing in the middle 80th percentile TTM. Style and Industry factors accounted equally for the factor volatility.
• Markets that classify as both volatile and factor-driven can present challenges for fundamental managers focused on driving alpha.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers Portfolio returned 14.9% this week, placing it in the 57th percentile over the trailing twelve months and the 52nd percentile since inception. This week’s volatility classified as “Neutral”.
• Factors accounted for only 18.9% of this week’s return categorizing the week as “Very Alpha-Driven”. This placed in just the 20th percentile TTM, and the 16th since inception.
• Country factors led the charge, accounting for 60% of the overall factor volatility, followed by Industry factors which accounted for 20%.

US Extreme Movers Portfolio Exposures

• Life Sciences Tools & Services and Health Care Equipment & supplies led the 12% long allocation to the Health Care sector which landed in the 87th percentile on a trailing-twelve-month basis.
• The drawdowns in Energy continued this week as Oil, Gas, & Consumable Fuels stocks accounted for 16% of Energy’s 18% short allocation. The Energy sector’s most recent long allocation in the US Extreme Movers portfolio was in mid-October.
• Information Technology was largely mixed at the industry level this week aside from Semiconductors & Semiconductor Equipment, which held an 11% long allocation. This was a strong reversal from last week when Semiconductors made up an 11% short allocation.

• Beta factors jumped significantly this week, reaching top decile positioning on an inception-to-date basis. Investors moved into higher beta stocks to capture the upward movement in the broader market as a result of the favorable Fed projections for 2024.
• The short allocations to Energy and Industrials along with long allocations to Financials and Health Care led an anti-Quality posture in the portfolio. The bullish investor sentiment we’ve seen this week placed less importance on company profitability, quality of earnings, and quality of management in favor of beta.
• Though to a lesser degree than last week, the portfolio was still underexposed to both Oil Beta and Interest Rate Beta factors. These exposures were both dominated by the short allocation to Energy.
• The portfolio maintained both HF Crowding and Short Interest stocks in its long book this week which points to the fact that both popular hedge fund longs and popular hedge fund shorts have been experiencing strong tailwinds. Hedge fund managers may have felt some challenges from upward price pressure in their shorts as a result.

International Extreme Movers Portfolio Exposures

• The Information Technology sector reached its 98th percentile since the International Extreme Movers portfolio’s inception in 2007 and its 94th percentile on a trailing-twelve-month basis. The 18% long allocation was driven by all industries but most notably by Electronic Equipment, Instruments, & Components.
• Metals & Mining stocks were again out of favor this week, leading to a 12% short allocation to Materials. That allocation marks just the 6th percentile over the trailing year. More than 9% of the short was concentrated in Hong Kong and China.
• Consumer Discretionary stocks were short across all industries, reaching the 2nd percentile over the trailing twelve months. Like Materials, Hong Kong stocks accounted for the majority at an 8% short allocation.

• The International portfolio was much more neutral on beta factors this week relative to the US portfolio but did show strong aversion to residual volatility factors. Underexposure to residual volatility typically points to a risk-off investor sentiment.
• Both growth and value factors were negative this week. Earnings Yield in Axioma’s Worldwide risk model even fell to its 8th percentile on a trailing-twelve-month basis. That exposure was driven largely by the short allocation to Industrials and the long allocation to Information Technology.
• While Interest Rate Beta exposure moved closer to neutral, Oil Beta exposure remained significantly negative due to the short exposure to Materials.

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 remained positive this week relative to Emerging Markets. The 21% long allocation marks the 78th percentile TTM.
• China was once again the standout in the short book, followed by Thailand. The 27% short allocation to China and the 9% short allocation to Thailand were concentrated in Consumer Discretionary and Materials stocks.
• European stocks were generally strong this week as Switzerland, Netherlands, and Belgium all landed above their 95th percentile on a trailing-twelve-month basis.

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Regards,

Reshma