Global Rate Hikes Drive Risk-Off Sentiment

Over the past several months, we've introduced Extreme Movers, the latest tool in our arsenal to understand what is driving markets from week to week. We also debuted an international version of the Extreme Movers portfolio to help investors compare fluctuating alpha opportunities and factor-driven dynamics between the US and the world. The Extreme Movers portfolios allow us to apply hindsight to the prior week's momentum to understand the following key questions better:

1. Was the preceding week an alpha-driven or factor-driven week?
2. What are the factor characteristics of the stocks that drove the market?

The Extreme Movers portfolios are weekly-rebalanced, market-neutral portfolios that consist of the top decile of stocks from the Russell 1000 and the MSCI ACWI ex-US, respectively, based on performance on the long side and the bottom decile on the short side. You can find additional information on the construction of the Extreme Movers portfolio in the May 22 edition of Factor Spotlight.

US Market Summary and Extreme Movers Metrics

US Market: 09/16/22 - 09/22/2022

• Markets continued the downward tumble this week in response to strengthening concerns of potential recession as central banks battle inflation. Technology stocks were particularly hard hit, with the Nasdaq down -4.2% for the five days ending September 22. The S&P 500 and Dow Jones weren’t far behind, ending the five days down -3.7% and -2.9%, respectively.
• Central banks around the world raised interest rates this week. The Fed raised rates by 75 basis points and signaled that this trend would likely continue, even at the cost of triggering a recession.
• Recent extreme downward pressure in the Japanese Yen, as the Bank of Japan continues to hold fast to a negative rate policy, spurred the government to step in to keep the currency afloat for the first time in over two decades.

Extreme Movers Portfolio Performance

Please note that the portfolio's return will always be positive by constructing a portfolio that is long the top movers and short the bottom movers in an index. That said, there are several areas we want to observe around weekly performance:

1. Is the weekly performance below or above the recent median weekly performance? Above the recent median means that the Extreme Movers portfolios had much higher dispersion than a typical week, most likely driven by higher factor volatility.
2. Is the weekly alpha contribution below or above the recent median alpha contribution? Above the recent median demonstrates that the significant market moves were more alpha-driven than in a typical week. Below the median, the market moves were more factor-driven than in a typical week.

• The US Extreme Movers portfolio returned 15.7% this week, falling short of the YTD median.
• The portfolio was heavily factor-driven, with style factors, in particular, contributing almost a quarter of the return.
• Short positions in Energy, Real Estate, and Software drove returns on the industry side, while anti-beta and anti-volatility themes drove the style side.

• The International Extreme Movers portfolio performed similarly to last week, notching 14.6% this week.
• Style return contribution was unusually high, contributing 15% of the total portfolio return. Like its US counterpart, anti-beta positioning drove the bulk of this return.
• Industry return was very concentrated, with Banks as the stand-out exposure driving industry returns. Long exposure in Brazil and heavy short exposure to the Yuan Renminbi were the top contributors to country and currency returns.

Extreme Movers Portfolio Exposure

Looking at the Extreme Movers from an exposure lens helps us decompose the individual styles and sectors associated with the portfolio's factor-driven performance and better understand broader patterns such as risk-on / risk-off or sector rotation.

• Financials, led by Banks, and Consumer Staples, led by Food, Beverages, and Tobacco, were heavily favored this week due to markets reacting to recession worries.
• Information Technology - driven by Software, took an about-face, falling heavily out of favor this week, as high growth, high beta stocks tumbled upon rate hike news.
• Energy also made a heavy negative pivot this week, becoming the most prominent short-sector position in the portfolio.

• Risk-off was the primary style theme for the US Extreme Movers portfolio this week. High beta, high volatility stocks fell heavily out of favor.
• Long crowded stocks also felt downward pressure this week, as illustrated by the short exposure within the portfolio. Paired with the anti-beta positioning, these exposures highlight risk-off sentiment from investors.
• Value and profitability came strongly back into the forefront with large long exposures in the portfolio, while growth swung to negative positioning.

• On the long side, the International portfolio was positioned similarly to the US counterpart, with heavy long positions in Financials - driven by Banks - and Consumer Staples.
• Health Care and Information Technology had prominent short positions in the portfolio, contributing heavily to the anti-beta and anti-volatility exposures.

• Again, we see a similar story in the International portfolio compared to the US counterpart. This week, the portfolio swung heavily against beta and volatility amid recession fears and a move towards risk-off.
• Value continued the upward march in international markets, with substantial long exposures this week. In contrast, Growth saw downward pressure, driven by the long position in Banks and the short position in Semiconductors.
• Long crowded names and high-interest rate sensitivity names were favored this week, likely driven by sentiment around the macro environment.

Regards,
Alyx