Financials Win While Tech Stumbles into Key NVIDIA Earnings Report

Market Summary

US Market: 8/23/2024 - 8/29/2024

• U.S. headline indices saw mixed performance this week. The Dow led with a 1.53% return, the S&P 500 followed with a 0.38% gain, while the Nasdaq posted a negative return of -0.58%.
• Global equities are continuing their recovery from the turbulent start of August and are poised to close with a fourth consecutive month of gains. The S&P 500 remains a standout performer, with just one negative month since last year and a 17% return this year. European markets have reached record highs, boosted by favorable inflation data.
• Nvidia’s quarterly report was released this week, with earnings surpassing analysts' forecasts, highlighting strong demand for AI chips and GPUs. Despite this positive performance, the stock experienced a significant decline due to concerns over the production challenges of the new Blackwell processor lineup, which has proven to be more difficult than expected.
• China’s market received a significant boost amid reports that the government may allow homeowners to refinance up to $5.4 trillion of mortgages to lower borrowing costs and stimulate consumption.

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 U.S. Extreme Movers portfolio delivered a 12.7% return this week, placing it in the “Neutral” category. This week's performance ranks in the 20th percentile for trailing twelve months and the 49th percentile since inception.
• Factors accounted for 25.7% of the total return landing in the “Neutral” category as well. This level of lands in the 53rd for trailing twelve months and 55th percentile since inception.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers portfolio fell into the "Calm" category this week with a 14% return. This week's performance ranks in the 16th percentile for trailing twelve months and the 38th percentile since inception.
• Factor returns were notably low, contributing just 18% of the total return, placing the portfolio in the "Very Alpha-Driven" category. This factor return ranks in the 12th percentile for both the trailing twelve months and since inception basis.

US Extreme Movers Portfolio Exposures

• Banks and Insurance stocks combined for a 30% long allocation in the US Extreme Movers portfolio this week which led to an overall 38% long in the Financials sector. That sector allocation was the highest over the trailing twelve months and reached the 99th percentile since inception.
• Information Technology experienced a massive reversal, going from the largest long allocation to the largest short allocation. Software and Semiconductors & Semiconductor Equipment accounted for 22 of the 28% short which fell to the 5th percentile since inception.
• Real Estate reached its top decile on both a TTM and ITD basis with a 12% long allocation. Specialized REITs were the primary contributors but all industries were net positive on the week.

• The reversal in tech led to a strong “risk-off” posture in the US portfolio. Beta and residual volatility factors all fell within the bottom quintile of exposures since inception. Axioma’s Volatility factor hit its 1st percentile over the past twelve months and the 8th percentile since the portfolio’s inception.
• Value came heavily back into favor as growth factors simultaneously fell off. Both Earnings Yield and Dividend Yield factors landed largely in their top deciles due almost entirely to the long allocation in Financials and the short allocation in Information Technology.
• HF Crowding dropped dramatically into negative territory as crowded tech stocks underperformed. Managers with long exposure to popular AI names in Semiconductors, Software, and IT Services likely felt increased downward price pressure as a result.

International Extreme Movers Portfolio Exposures

• The International portfolio pointed to a far quieter sector story as no sector reached double digit allocations this week. Energy did reach its 94th percentile on a trailing-twelve-month basis with a 6% long allocation which was made up entirely of Oil, Gas, & Consumable Fuels stocks. More than 4 of the 6% was attributable to the Asian market.
• Metals & Mining stocks accounted for nearly a 10% short allocation which drove Materials to its bottom quintile on both a TTM and ITD basis. Stocks in South Africa made up 4 of the 10%.
• Chinese Semiconductor & Semiconductor Equipment stocks drove the 6% short allocation to Information Technology which reached its 19th percentile since inception.

• Despite a lack of severe sector rotations, style exposures pointed to greater stock dispersion in international markets. Short allocations in Materials and Information Technology led to strongly negative exposures to residual volatility factors.
• Profitability and Investment Quality factors reached upper quartiles. That combined with the negative residual volatility exposures, suggests that investors were searching for “safety” by avoiding highly volatile names and seeking refuge in companies with healthier financials.
• Wolfe’s Short Interest factor climbed to the 91st percentile on a trailing-twelve-month basis due to a rally in Japanese stocks amid a positive turn in economic outlook.

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.

• The International portfolio showed geographic consistency over the past two weeks as Developed Markets once again accounted for the majority of the long book. The 33% long landed in the 93rd percentile over the last twelve months while EM’s -33% fell to the 6th percentile.
• The DM allocation was largely attributable to the renewed economic optimism in Japan as the country accounted for 19 of the 24% allocation to the Pacific region.
• China, on the other hand, had another difficult week, clocking a 31% short allocation which marked the 6th percentile since inception.

Regards,
Jose