Financials Outperform to Kick Off Earnings

Market Summary

US Market: 10/11/2024 - 10/17/2024

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• US headline indices showed strong returns this week. The Dow led the way with a return of 1.85% over the five trading days ending Thursday. The S&P 500 and the Nasdaq followed at 1.06% and 0.50%, respectively.
• On Thursday, the European Central Bank provided its third interest rate cut of 2024 as inflation continues to ease more quickly than expected. The 25 basis point cut brings the target rate down to 3.25%. The STOXX 600 index was up 0.84% in Thursday trading.
• The US presidential election trade has picked up steam as election day is just eighteen days away. The average month-to-date returns in our broker partners’ Republican Policy baskets represent more than a four standard deviation positive move while the Democrat Policy baskets have moved an average of more than three standard deviations in a negative direction.

Extreme Movers Portfolio Performance

Note: Extreme Movers definitions can be found in the Factor University section on our website.

US Extreme Moves Volatility and Factor-Driven Speedometers

• The US Extreme Mover Portfolio delivered a 15.7% return this week which reached the 71st percentile since inception. That return level categorizes this week as “Volatile”.
• Factors contributed 25.1% of the total return which landed in the 53rd percentile since inception and is categorized as “Neutral”.
• During earnings season, we typically see that volatility tends to become more alpha-driven rather than factor-driven.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme movers portfolio stayed in “Volatile” territory this week with a return of 17.2%. That return marks the 74th percentile since inception and the 76th percentile on a trailing-twelve-month basis.
• However, unlike last week, which was “Very Factor-Driven”, this week flipped all the way to “Very Alpha-Driven” with an 18.9% factor contribution to return.
• Weeks that are both “Volatile” and “Very Alpha-Driven” provide fundamental managers with a beneficial environment to drive idiosyncratic value.

US Extreme Movers Portfolio Exposures

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• Financials surged this week as the top allocation in the US Extreme Movers portfolio, its position marking the 96th percentile since inception. Half of the 25% allocation was driven by Banks, along with another 7% from Capital Markets.
• Energy was the worst sector this week, with a short 22% allocation that ranked in just the 5th percentile over the trailing twelve months and the 10th percentile since inception. Oil, Gas, & Consumable Fuels was the overwhelming driver of this move at -19%.
• Information Technology saw a sharp swing from the week prior, dropping from the most represented sector to the least represented, with a short allocation of 22%. This ranked in the 10th percentile since inception and was driven primarily by Semiconductors & Semiconductor Equipment at -15%.

• Beta factors were mixed this week, while Volatility factors were mildly in favor, suggesting that investors were not particularly risk-on. The positive volatility was driven largely by the long book, as investors leaned into higher vol names particularly in Health Care, Tech, and Consumer Staples. The low beta was driven mostly by the short book, and particularly within Consumer Discretionary and Tech.
• There was an aversion to Growth factors this week, led primarily by the long book as investors reached for names in Financials, Real Estate, and Materials. Value, on the other hand, was in favor, with Wolfe’s Earnings Yield factor in particular reaching the 84th percentile since inception. The positive value was driven by the short book, as investors were primarily shorting companies with low Earnings Yields.
• Macro also saw negative exposures this week, particularly Oil Beta, which reached the 12th percentile for the trailing-twelve months, as the Energy sector was heavily shorted this week.
• Crowding was fairly neutral while Short Interest was positive, driven by investors buying high-short interest names. This suggests that hedge fund managers may have faced some pressure in their short books this week.

International Extreme Movers Portfolio Exposures

• Mirroring the US, Financials was the top sector in the International Extreme Movers portfolio this week, with a 19% allocation that was the highest seen in the trailing-twelve-months, and placed in the 91st percentile since inception. This was driven primarily by Banks at 16%, followed by Insurance at 4.5%.
• Healthcare saw a big dip, coming in as the second lowest sector this week and ranking in the 11th percentile since inception. All industries were negative, but over half of the -8% allocation was driven by Healthcare Equipment & Supplies along with Life Sciences Tools & Services.
• Consumer Discretionary became the least represented sector this week, with a -8% allocation that placed in the 8th percentile for the trailing-twelve months and the 11th percentile since inception. Automobiles drove more than half of this, though all industries except for 'Automobiles Components' and 'Household Durables' were negative.

• Beta and Volatility were firmly out of favor this week, with Barra’s Residual Volatility factor reaching the lowest position in the trailing-twelve months, and the 1st percentile since inception. This came as investors shorted higher-vol and higher-beta names, particularly in Consumer Discretionary and Communication Services.
• Growth factors were strongly negative, while Value was strongly positive, with all but one value factor ranking above the 90th percentile over the trailing twelve months. The low Growth was driven by the long book, as investors leaned into sectors like Real Estate. Value was also driven by the long book with this week’s push into Financials and Industrials.
• HF Crowding was positive, while Short Interest was notably negative, reaching its lowest point over the trailing twelve months and the 1st percentile since inception. Both exposure were driven by the short book, as investors sold less-crowded names, while also selling high short-interest names. This likely benefited hedge fund managers on the short side.

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 were slightly favored this week, with a 6% long allocation that placed in the 55th percentile since inception. Emerging Markets had a short 7% allocation, landing in the 37th percentile since inception.
• Within Emerging Markets, Asia remained the driving force, outweighing the positive allocations from the other EM regions. This was primarily due to China, which had a -29% allocation that placed in the 7th percentile since inception.
• In the Developed Markets, Canada along with the UK were the main drivers of the week. Both countries had a long 5% allocation that landed in the 88th percentile and 91st percentile TTM respectively.

Regards,

Reshma