Geopolitical Unrest Drives Volatility Up and Markets Down

Market Summary

US Market: 2/21/2025 - 2/27/2025

• U.S. headline indices were all down over the previous five trading days. The Nasdaq experienced the largest decline at 7.31%, followed by the S&P 500, which fell 4.13%. The Dow experienced a more modest dip of 1.33%.
• This decline was paired with increasing volatility; the VIX was up 35.19% over the same timeframe, and up 22.78% on the year.
• As February comes to a close, macroeconomic uncertainly is diminishing investors’ desire to take on risk. The S&P 500 is down 0.71% for the year as of Thursday’s close, while treasuries have gained to start the year, leading to the biggest divergence in favor of debt to start a year since 2020. Speculative assets like crypto are in decline as well; as of Friday morning, Bitcoin had fallen 25% from its all time high achieved six weeks ago.
• The Bureau of Economic Analysis released their PCE report on Friday showing that prices in January rose 0.3% month-over-month and a mild 2.5% year-over-year. Consistent with recent declines in consumer sentiment, the report also showed that inflation-adjusted consumer spending fell 0.5% in January, which is the biggest monthly decline in almost four years.
• Friday’s meeting between President Zelensky of Ukraine and President Trump was contentious and centered on Ukraine’s conflict with Russia. The stated goal of signing a proposed minerals deal to give the US access to rare earth minerals critical to AI and military developments was not met as the Ukrainian president left the meeting early.
• Trump’s proposed tariffs continue to make waves in the global economy. Chinese stocks fell on Friday after Trump escalated the trade war by proposing an additional 10% tariff on imports from China and President Xi vowed retaliatory measures. Crude Oil futures declined for the sixth straight week as Trump affirmed that proposed 25% levies against Canada and Mexico, the two biggest suppliers of foreign oil to the US, will begin March, 4th.

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 Movers portfolio saw a 20.1% return this week, ranking in the 88th percentile for both trailing twelve months and since inception. This level of performance marks the week as being “Very Volatile”.
• Factors accounted for 39.8% of the total return, placing the portfolio in the “Very Factor-Driven” category. This ranks in the 96th percentile for the trailing twelve months and the 88th percentile since inception.
• Weeks classified as both “Very Volatile” and “Very Factor-Driven” present a challenging environment for fundamental investors because alpha is scarce but there is still significant price movement in the market.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers portfolio earned a 16.9% return, placing it in the "Volatile" category for the week. This return ranks in the 73rd percentile over the trailing twelve months and the 72nd since inception.
• Factors accounted for 26.2% of the total return, which classifies as "Neutral". This level of factor return is in the 51st percentile for the portfolio over the trailing twelve months and the 46th since inception.

US Extreme Movers Portfolio Exposures

• Consumer Staples led the US portfolio this week with a 19% allocation, ranking in the top percentile for the trailing twelve months and the 99th percentile since inception. All industries within the sector contributed positively, except for Consumer Staples Distribution & Retail, with 'Beverages' as the largest contributor at 8%.
• Health Care was the second-largest sector, holding an 18% allocation, placing it at the top rank for the trailing twelve months and the 93rd percentile since inception. Pharmaceuticals was the most represented industry within this sector, also with an 8% allocation.
• Information Technology had the lowest representation, with a -27% allocation, ranking in the 7th percentile for the trailing twelve months and the 5th percentile since inception. All industries in this sector contributed negatively, with Software being the most significant at -10%.

• Beta and Volatility factors were heavily out of favor this week, with three of the five factors ranking near the bottom for both the trailing twelve months and since inception. Axioma’s Market Sensitivity fell to the 1st percentile for trailing twelve months, with both the long and short segments contributing equally to this negative exposure.
• Growth factors were notably out of favor this week, with both ranking in the 1st percentile for the trailing twelve months. The primary driver of this negative allocation was the short exposure to the Information Technology sector.
• In contrast, Value factors performed strongly this week, with several ranking above the 90th percentile for both the trailing twelve months and since inception. Wolfe’s Dividend Yield stood out, landing in the 98th percentile for both periods. This positive exposure was driven by contributions from both the long and short sides of the portfolio, with the short side being the primary driver.

International Extreme Movers Portfolio Exposures

• Financials emerged as the most represented sector in the International Portfolio this week, with an 8% allocation, ranking in the 65th percentile for the trailing twelve months and the 71st percentile since inception. Banks led within the sector, contributing 4% alone.
• Consumer Staples became the second most represented sector, with a 6% allocation, ranking in the 89th percentile for the trailing twelve months and the 83rd percentile since inception. Food Products was the most dominant industry, contributing 4%, while Beverages accounted for nearly 3%.
• Energy remained the least represented sector this week, with a -8% allocation, ranking in the 8th percentile for the trailing twelve months and the 14th percentile since inception. The sector’s entire allocation was driven by Oil, Gas & Consumable Fuels.

• Value factors performed well this week, with all factors landing in positive territory. Barra’s Dividend Yield was particularly strong, with a 0.47 exposure, ranking in the 95th percentile for the trailing twelve months and the 93rd percentile since inception.
• Crowding factors had a mixed performance this week. Short Interest was in favor, with a 0.39 exposure, placing it in the 89th percentile for both the trailing twelve months and since inception. Both the long and short segments of the portfolio contributed to this positive exposure. On the other hand, HF Crowding was slightly out of favor, with all the negative exposure stemming from the long book, indicating that investors preferred names not present in HF books.
• Quality factors were out of favor this week, especially Barra’s Profitability, which ranked in the 2nd percentile for the trailing twelve months and the 6th percentile since inception. Both the long and short books contributed to this negative exposure, suggesting that investors favored low profitability names in the long book and high profitability names in the short book.

International Extreme Movers Portfolio Country Exposures

This 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 continued to perform well this week with a 22% allocation, ranking in the 74th percentile for the trailing twelve months and the 76th percentile since inception. In contrast, Emerging Markets had a -20% allocation, placing the region in the 22nd percentile for the trailing twelve months and the 20th percentile since inception.
• Within Developed markets Europe was the main contributor to accounting for 33% of the total allocation. Europe ranked int he top percentile for trailing twelve months. Within Europe, Germany was the most represented accounting for 8% alone. The rest of the regions within DM saw negative allocations.
• Within Developed Markets, The Americas had the most negative allocation at -13%, placing the region in the 7th percentile for the trailing twelve months. Within this region, Brazil was the primary driver of the negative allocation, contributing -11% on its own.

Regards,

Jose