Financials Struggle Despite Stellar Reports From Big Banks

Market Summary

US Market: 6/23/2023 - 6/29/2023

• US Markets ended slightly in the green, as a two-day winning streak since Wednesday resulted in a weekly performance of 0.63%. Nasdaq led the way posting a 0.73% return, while the Dow followed at 0.52%. The S&P came in behind but still in positive territory, at 0.33%.
• While the FED signaled that near-term rises in rates are “inevitable” to continue with the fight against inflation, recent reports show consumer confidence at the highest levels since the beginning of 2022. Jobless claims also fell the most in June than in any of the last twelve months.
• The FED launched its yearly “stress test” to assess the strength of the balance sheets of the major players in the Financials sector. Reports claimed that major banks passed with flying colors, with JP Morgan being the biggest winner as the stock rose 4.5% after the news.

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 returns mimicked those of last week, posting a 12.3% return over the week. This places it in the third quartile since inception, categorizing the week as “Neutral” in terms of volatility.
• Factor return contribution was also close to that of last week, decreasing 1.7% to 23.3%. This represents the 49th percentile ITD and the 30th percentile TTM.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Markets differed significantly from the US Markets in terms of volatility. The returns of the portfolio were 12.2% over the week, which classifies this week as “Very Calm”.
• Close to its US counterpart, factors in international markets accounted for 26.5% of the portfolio's return, ranking in the 47th percentile since 2007. This classifies the week as "Neutral" in terms of factor contribution to performance.

US Extreme Movers Portfolio Exposures

• Communication Services was the largest long allocation in the US portfolio this week at 16%. Nearly all of that allocation came from Media & Entertainment stocks. The 16% long allocation was the largest for Communication Services over the last twelve months and fell in the 99th percentile since inception.
• The Financials and Health Care sectors struggled this week. Banks, Insurance, and Capital Markets were the key laggards in Financials while Biotech and Pharmaceuticals led the short allocation in Health Care.
• Information Technology, which took a huge hit last week, recovered largely due to a 5% long allocation to Software.

• Investors swung back into “risk-on” positioning as beta and growth factors moved into positive territory as a result of the long allocation to Information Technology and the short allocation to Financials.
• The short allocation to Financials was also evident in the aversion to value factors. The portfolio’s exposure to Barra’s Dividend Yield factor fell to its 10th percentile since inception, while all value-oriented factors were negative.
• The market favored stocks that tend to be less correlated or even inversely correlated to interest rates and oil prices. The negative exposure to interest rates was driven by the short allocation to Financials while a long allocation to Industrials drove the bulk of the anti-Oil Beta positioning.
• The US portfolio’s exposure to Wolfe’s Short Interest factor reached its 88th percentile since inception which points to significant rallies in popular hedge fund short positions.

International Extreme Movers Portfolio Exposures

• The International portfolio differed from the US in that Information Technology was its largest short allocation of the week. Electronic Equipment stocks in Taiwan, South Korea, and Japan accounted for the majority.
• Stocks in Hong Kong, Switzerland, and Denmark gave Industrials a 13% long allocation which landed in the 96th percentile since inception. On an industry level, Marine Transportation stocks were the biggest winners.

• The International portfolio was far more value-oriented than its US counterpart. The long allocations to Industrials and Utilities accounted for more than half of the exposure to value factors.
• The shift away from Growth was almost entirely captured by short allocations to Materials and Energy. Australian stocks in these two sectors were an area of particular concentration.
• From a macro perspective, the International portfolio aligned with the US as investors favored stocks with less correlation to oil prices and interest rates.
• The International portfolio was also long popular shorts which likely resulted in challenges for hedge fund short sellers.

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.

• At a high level, the International portfolio favored Developed Markets over Emerging Markets this week as the 12% long allocation to DM landed in the 64th percentile since inception. Most of that long allocation was attributable to Europe.
• Despite a net short allocation to Emerging Markets, Chinese stocks made up a 23% net long allocation which was heavily driven by the Industrials and Consumer Discretionary sectors.

Regards,
David

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