Factors Take the Stage Driven by Beta and China

Over the past several weeks, 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: 07/28/22 - 08/04/22

• Markets rallied this week on positive sentiment from another aggressive interest rate hike from the Fed. All three major US indices posted positive returns for the five days ending August 4, with the Nasdaq surging 4.6%. The S&P 500 returned 2%, and the Dow returned 0.6% over the period.
• The US July Jobs report showed 528,000 new jobs added in the last month, which was approximately 2x higher than expectations. Despite the past week's rally, the markets pulled back on Friday amid continued inflation concerns around the hot economy.
• Investors also felt concerns this week over US-China tensions as Nancy Pelosi visited Taiwan, sparking military mobilization and sanctions from China.

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 massive return over the last week, ending a streak of relatively low returns for several weeks. This week's return of 26% was the third largest weekly return this year.
• Alpha contribution came in below average, with about 60% contribution, while style factors made a strong showing, contributing over 30% of the total return. Beta factors significantly drove style factor contribution.

• The International Extreme Movers portfolio saw a similar uptick in return as the US counterpart, with a weekly return of 20.5%.
• Country exposures drove the the most extensive Country return contributions seen in the portfolio for the entire year. In particular, exposure to China alone drove one-third of the return while alpha contribution was well below the year-to-date median.

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.

• Information Technology is back in the forefront this week, with a massive overweight of 36% in the US Extreme Movers portfolio. Consumer Discretionary also saw a similar upswing from last week to become the second largest overweight.
• Health Care, Energy, and Materials saw opposite moves, going from last week's favored sectors to some of this week's largest underweights.

• Beta was the style story this week, with Beta & Volatility factors showing large overexposures across all models. These low exposures were a significant shift from last week's downward pressure on high beta names and also represent a divergence away from the negative year-to-date average exposure.
• Value & Quality also played a significant role in the risk profile of this week's portfolio. These factors fell out of favor across the board, with large underexposures for all risk models and definitions of value and Quality.
• Oil Beta exposure reversed course this week, with a large underexposure in the portfolio. This underexposure reflects the plummet in oil prices as demand for gas continues downward.
• Crowding factors were back on the upswing, with both long and short crowding showing large positive overexposures and likely creating pressures on short sellers.

• Materials, Consumer Discretionary, and Information Technology were strong sector stories in this week’s International Extreme Movers portfolio. Like its US counterpart, Consumer Discretionary, in particular, made an impressive showing compared to being the largest underweight in last week's portfolio.
• Financials exposure saw a significant fall from being the largest overweight last week to slight underweight this week.
• Health Care remained an unfavored sector internationally. This sector posted the largest underweight in the portfolio this week.

• The International Extreme Movers portfolio showed a similar story from a style perspective as the US portfolio. Beta factors showed large overexposures, and Value & Quality factors showed major underexposures.
• However, Volatility factors in the international portfolio showed some divergence from the US portfolio. Volatility in both the global Barra & Axioma models had a strong underexposure in the portfolio.
• Underexposures to the Oil Beta & Interest Rate Beta factors show continued downward pressure from the macro environment internationally.

Regards,
Alyx