Equity Markets Slip on CPI-Fueled Sell-Off

Market Summary

US Market: 4/5/2024 - 4/11/2024

• US headline indices had mixed performance over the five trading days ending Thursday. The tech-heavy Nasdaq was up 1.6%, followed by the S&P 500 with a modest gain of 0.4%. The Dow came in negative at -0.4%.
• US inflation data released Wednesday showed hotter-than-expected results for March, which sent US indices tumbling. The CPI increased 3.5% for the 12 months ending March, up 0.3% from February, while core inflation remained steady at 3.8%.
• The Euro fell to its lowest level this year, marking the largest 3-day drop in the past 14 months. The followed the ECB’s meeting which kept rates steady at 4% while signaling the prospect of a cut in two months time, even as expectations waver for a similar Fed rate cut.
• The Euro fell to its lowest level this year, marking the largest 3-day drop in the past 14 months. The followed the ECB’s meeting which kept rates steady at 4% while signaling the prospect of a cut in two months time, even as expectations waver for a similar Fed rate cut.
• China’s March trade data showed that exports declined by a sharp 7.5% and imports shrank 1.9% last month, with both undershooting market forecasts by large margins. The news had Chinese stocks ending the week in the red.

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 12.0% which categorizes this week as “Neutral”. That return falls in the 43rd percentile since inception but just the 8th percentile on a trailing-twelve-month basis.
• After last week’s spike in factor volatility, factors accounted for only 18.0% of the portfolio’s return this week which lands in “Alpha-Driven” territory. This contribution marks the 29th percentile of all weeks since inception.

International Extreme Movers Volatility and Factor-Driven Speedometers

• International markets saw much less volatility this week as the ex-US Extreme Movers portfolio returned 13.8%. That return places the week in the 22nd percentile over the trailing twelve months and is categorized as “Calm”.
• International portfolio pointed to a “Neutral” week as 28.5% of the performance was attributable to systematic factors. Country factors drove over half of this contribution, which marked the 56th percentile since inception.

US Extreme Movers Portfolio Exposures

• Health Care saw a sharp reversal this week as it climbed to the highest long allocation in the US portfolio. The 14% allocation was driven heavily by Health Care Equipment & Services and Biotech.
• Software led the way for Information Technology with a 9% long allocation which was the largest industry allocation in the portfolio this week. Health Care, Information Technology, and Consumer Staples were three of the four most significant short allocations last week and became the biggest long allocations this week.
• Consumer Discretionary was once again at the low end of the allocations with an 18% short. Like last week, Specialty Retail accounted for the highest contribution followed by Household Durables and Textiles, Apparel, & Luxury Goods.

• Beta and Volatility factors diverged this week as investors favored stocks with lower beta but higher residual volatility. The low beta exposure largely came from the short allocation to Consumer Discretionary while the residual volatility exposure was driven mostly by the long allocation to Health Care.
• Favoring Software and selling Financials and Consumer Discretionary led to a bias toward growth factors and away from value factors. Wolfe’s Earnings Yield exposure landed in the 10th percentile on a trailing-twelve-month basis while Axioma’s Growth factor climbed to the 87th percentile.
• Despite another hot inflation report, Interest Rate Beta exposure fell to a neutral position while the long allocation to Energy kept Oil Beta exposure in positive territory.

International Extreme Movers Portfolio Exposures

• Metals & Mining had by far the highest industry long allocation of the week at 17% which led to Materials reaching the 96th percentile on a trailing-twelve-month basis. Stocks in South Africa and Hong Kong were the largest contributors.
• Unlike in the US, Consumer Discretionary was in favor across international markets. Automobile stocks in Hong Kong accounted for more than half of the 10% long allocation.
• Information Technology also differed between US and international markets. Semiconductors and Software stocks, primarily in China and Taiwan, drove a 9% short allocation which fell in just the 10th percentile since inception.

• Residual Volatility factors were favored relative to beta this week which hints at the fact that investors opted to take less market-correlated volatility but still had appetite for risk. The International portfolio’s exposure to Barra’s Residual Volatility factor landed in the 83rd percentile on a trailing-twelve-month basis.
• Both growth and value factors were again positive this week, indicating that investors are looking for growth at a reasonable price. That trend was most evident in the Consumer Discretionary sector.
• Wolfe’s HF Crowding factor reached its 79th percentile since inception while Short Interest was neutral which points to the likelihood that hedge fund managers felt some tailwinds in their long books this week.

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.

• Investors continued to favor Emerging Markets relative to Developed Markets this week as EM accounted for a 26% long allocation. That 26% reached the 86th percentile on a trailing-twelve-month basis.
• Unlike last week, EMEA was the largest contributing region to EM’s allocation. Turkish stocks across sectors and South African Materials stocks accounted for a significant portion of EMEA’s 16%.
• Developed Europe, on the other hand, saw a 30% short allocation which reached just the 6th percentile on a trailing-twelve-month basis. The short allocations to Germany and France, driven by Financials and Industrials, were both in the bottom decile on a trailing-twelve-month basis.

Regards,
Reshma