Hazy 2023 Outlook Putting Stocks Through the Wringer

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: 12/2/2022 - 12/08/2022

• Stocks struggled this week after last week’s rally. For the five days ending December 8, the Nasdaq dropped -3.49%, followed by the S&P at -2.77% and the Dow at -1.78%.
• November payroll and wages exceeded expectations, forcing investors to question the Fed's easing policy in combating inflation.
• Financials took the biggest hit this week as big banks and other financial institutions continued to cut jobs at an increased rate.

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 performed just above the YTD median, with a 17.67% weekly return which lands in the 52nd Percentile YTD.
• Alpha contributed 75% to the total performance, with Style and Industry evenly sharing the remaining 25%.
• Beta factors heavily drove style contribution. A short allocation in Banks, Oil, Gas, and Consumable Fuels led industry contributions.

• The International Extreme Movers portfolio had a return this week of 16.65%, a percentage point shy of the 17.9% YTD median, placing it in the 29th Percentile YTD.
• Alpha's contribution of 76% is the fourth-highest YTD and the highest since mid-September. This elevated level puts it in the 94th Percentile YTD.
• Style factors had a negative contribution to performance, at -0.31%. This level represents the first time any factor category negatively impacted performance since we began analyzing the data in January. The Beta and Residual Vol factors were responsible for most of the style underperformance.

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.
To provide a relative perspective on the size of the exposures, we’ve adjusted the third column from YTD Average to YTD Ptile (“percentile”). With >200 trading days into the year, we’ll highlight any exposures that are in the top 10 trading days (95%+) or any exposures in the bottom 10 days (<5%).

• Health Care continued to lead the long book, at a much higher allocation than last week, representing the 93rd Percentile YTD. This long exposure was driven mainly by Biotechnology and HC Equipment, while Life Sciences Tools & Services had an opposing short allocation.
• Financials saw a heavy underexposure in the portfolio, driven mainly by a short position in Banks, followed by a modest short position in Consumer Finance.

• Beta & Volatility factors saw extreme underexposure, driven mainly by the short side of the book.
• Value and Growth factors reversed close to their means, with all factors positioned within 10% of the YTD 50th percentile.
• Short-crowded names experienced heavy underweight exposure. The vast majority of this underexposure is attributable to the long positions in Consumer Discretionary and short positions in Information Technology.

• The international portfolio showed a much less dramatic sector distribution this week, with no allocation exceeding 11%.
• Financials and Energy, driven by Banks and Oil, Gas, & Consumable Fuels, were the consistent short allocations this week, while consumer sectors were favored at a combined 17% long position. Energy’s allocation was in the 5th percentile YTD.

• While Growth factor exposures did not see much variation from last week, Value factors saw underweight exposures across the board. Similar to those from the US counterpart, the short side of the book primarily drove these exposures.
• Short Interest exposure was the highest of all factors and placed it at 82% Percentile YTD. The sector breakdown is highly dispersed, with Materials, Info Tech, and Energy contributing positively to this exposure, while Communication Services and Consumer Discretionary contributing negatively at a smaller magnitude.

Regards,
David