Financials Rebound as the Bank Dust Settles

Market Summary

US Market: 4/14/2023 - 4/20/2023

• US headline indices experienced a slight downturn this week, with all three major indexes declining. Nasdaq took the hardest hit, with returns of -0.80% from Friday to Thursday. The Dow and the S&P returned -0.71% and -0.40%, respectively.
• Corporate earnings calls continued this week but did not cause significant market movements, as investors are still processing news in light of the uncertain economic future.
• The Financials sector continued to recover, indicating that the SIVB implosion may have been an isolated incident that will not have a widespread impact on the industry. Major banks like JPM, BofA, and Goldman Sachs showed strong promise during their earnings calls, driven by healthy deposit levels.

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

• Alpha and Factors battled for importance as Factor-Driven Speedometers landed in Neutral territory this week, reverting from the Alpha-rich environment markets experienced the prior week.
• More than 90% of the Factor-Driven performance came from Industry Factors.
• US markets also landed in neutral territory in terms of volatility, which is unusual to see during earnings season. The portfolio's volatility landed in the 57th percentile Inception-To-Date.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International portfolio showed that markets remain in Calm territory this week. The portfolio repeated returns of 14%, which fall in the 39th percentile since inception.
• The international portfolio showed Alpha-Driven performance, with Alpha accounting for 76.4% of the total performance. This week, the portfolio's Alpha performance ranks in the 67th percentile inception-to-date.

US Extreme Movers Portfolio Exposures

• Financials led the portfolio this week with a 31% long allocation, its highest over the trailing twelve months (TTM) and the 98th percentile inception-to-date (ITD). Banks and Capital Markets drove over 80% of this, more than tripling their allocations from the week prior.
• All industries within Information Technology continued to show a negative allocation, with the sector landing in the 5th percentile ITD. In contrast to the week prior, Electronic Equipment, Instruments & Components, and Communications Equipment were the critical drivers, while Semiconductors and Software played a lesser role.
• Consumer Discretionary emerged as the second largest positive allocation after landing at the bottom of the portfolio last week. A significant rebound in Hotels, Restaurants & Leisure drove the change.

• Beta remained relatively neutral this week, while residual volatility turned negative, landing in the bottom quartile ITD. Long positions drove positive Beta and Volatility exposures while short positions diversified, indicating that investors remained focused on high beta and high volatility stocks for long and short investment ideas.
• Popular shorts declined this week, indicated by the swing from positive to negative exposure for Short Interest. HF Crowding maintained a similar exposure to the week prior.
• Interest Rate Beta rose to the top quintile ITD, driven by positive exposures on both the long and short sides of the portfolio. This week's heavy allocation to Financials explained much of the positive exposures. Investors flocked toward stocks with a positive relationship to rising interest rates and fled from stocks with an inverse relationship.
• Value moved to more positive terrain, with most indicators landing in the top quartile ITD. Exposures were largely positive on both the long and short sides, indicating that investors favored high-value and shorted low-value stocks.

International Extreme Movers Portfolio Exposures

• Echoing the US portfolio, Financials and Information Technology were the main stories this week, respectively landing in the top and bottom decile ITD. Financials were led overwhelmingly by Banks, particularly in China and Poland. Information Technology was concentrated in Taiwan, China, India, and Hong Kong.
• Six out of eleven sectors had opposite exposures to the week prior, driven heavily by a pullback in allocations to Brazil and Hong Kong.
• Real Estate pushed deep into negative territory, landing in the 7th percentile ITD. Real Estate Management & Development in Hong Kong drove this fall almost exclusively. In contrast, Consumer Discretionary jumped up to the top quintile ITD. This upward movement was led by a reversal in allocations to Consumer Services, particularly in the US and several European nations.
• The long book was dominated by Hong Kong, South Korea, and China, contributing a combined allocation of 40%. The short book saw a heavy 20% allocation to Hong Kong, followed by other short allocations across Brazil, China, and Taiwan.

• Volatility exposure turned negative this week, driven heavily by short positions in Hong Kong, Brazil, and Turkey. Beta was also driven almost entirely by short positions, suggesting that low beta names were out of favor, particularly in Brazil and China.
• Growth pushed towards positive territory, and Value remained positive, though dampened slightly relative to the week prior. Both exposures were mainly driven by the long book, suggesting a reversal from last week's sentiment as investors regained confidence in growth names.
• In contrast, positive exposure to Earnings Yield came from both sides of the book, indicating that investors pushed further into high-yield stocks and avoided low-yield stocks.
• Positive exposures to HF Crowding came from both sides of the book, as investors shorted uncrowded names in Hong Kong and Taiwan while buying crowded names in China and Europe. Short Interest was also positive this week, suggesting investors were more bearish.

Regards,
David