Investors Go Risk-Off With Steady Rates

Market Summary

US Market: 1/26/2024 - 2/1/2024

• US headline indices were mixed this week. The Dow topped the group at 1.2% while the S&P and the Nasdaq followed at 0.3% and -1.0%, respectively.
• US Equities fell sharply on Wednesday following Fed Chair Jerome Powell’s comments surrounding the unlikelihood of a rate cut in March. Optimism for cuts later in 2024 are still alive and stocks recovered in Thursday’s trading session.
• It was a big week for tech earnings as Meta, Amazon, and Apple all beat earnings estimates. Meta and Amazon rallied following their announcements while Amazon’s stock price struggled due to decreases in revenue coming from China and weakened outlook on iPhone sales.

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 snapped a four-week streak of “Volatile” markets, notching a return of 13.8% which landed in the 39th percentile since inception and was categorized as “Neutral”.
• Factor contribution dropped significantly, which isn’t uncommon during earnings season. The 17.1% contribution from factors marked the 26th percentile since inception which falls in “Alpha-Driven” territory.

International Extreme Movers Volatility and Factor-Driven Speedometers

• Ex-US volatility was much higher than US volatility as the International Extreme Movers portfolio returned 18.9% this week. That return falls in the 82nd percentile since inception and is therefore categorized as “Very Volatile”.
• That volatility was dictated by systematic factors in the market. 30% of the portfolio’s return was attributable to factors which fell in the 63rd percentile since inception and was categorized as “Factor-Driven”.

US Extreme Movers Portfolio Exposures

• Information Technology stole the spotlight this week with a noticeable 30% short allocation, representing the 6th and 4th percentiles on a TTM and ITD basis, respectively. This follows last week’s unusually large 37% positioning in the sector. Semiconductors & Semiconductor Equipment accounted for two thirds of this large negative allocation.
• Health Care and Industrials saw the largest weights, each at 9% and just a few percentage points shy of the top quintile TTM. the Health Care allocation was mostly concentrated in Biotechnology, contrary to Industrials which saw positive allocations across the board.
• Other notable allocations are Materials and Utilities, which at only 3% weights landed in the top quintile TTM. Both saw positive allocations from a wide spectrum of industries.

• This week, the U.S. portfolio showed a shift towards risk-averse characteristics, evidenced by low beta and low to neutral volatility exposures, primarily influenced by short positions. This suggests that investors wagered against stocks characterized by high beta and high volatility.
• Value exposure moved closer to the mean, with Dividend Yield landing just shy of the 50th percentile mark both on a TTM and ITD basis. Conversely, Growth saw negative exposures, landing close to the bottom decile TTM and close to the bottom quintile ITD.
• Interest Rate Beta and Oil Beta aligned closely to their historical mean, as negatively contributing longs offset positive contributing shorts in both cases. This implies that investors favored names with inverse relationships to rising rates and rising oil prices for both their long and their short books.

International Extreme Movers Portfolio Exposures

• Information Technology had the largest impact on the short allocation with a -16% weight, placing it in the 2nd percentile ITD and near the factor's historical minimum. Semiconductors & Semiconductor Equipment accounted for approximately -6.5% of this allocation, with Electronic Equipment, Instruments, & Components contributing -5.4%.
• Both Communication Services and Health Care were positioned in the bottom decile for TTM and ITD. Within Communication Services, Entertainment accounted for half of its allocation, whereas in Health Care, Biotechnology and Pharmaceuticals each made up one-third of the sector's allocation.
• Energy stood out as the leading contributor to the long allocation, achieving a position in the top decile for TTM, predominantly due to Oil, Gas & Consumable Fuels. Materials and Real Estate also made significant contributions, each driven by multiple industries within their sectors.

• The portfolio exhibited anti-volatility and anti-beta behavior, evidently proven by seeing the volatility factors at a 4th percentile ITD. The vol exposure came from the shorts while the beta exposure came from the longs, implying that investors piled on anti-beta names while betting against highly volatile ones.
• Growth saw one of the lowest exposures historically, with one of its indicators at the 1st percentile ITD. Meanwhile, Value saw extremely high exposures across all descriptors coming from both sides of the book. This implies that investors bet against growth-behaving, anti-value names, while simultaneously purchasing value-behaving ones.
• Oil Beta landed close to its historical mean, while Interest Rate Beta saw positive exposures coming from both sides of the book, from where we can infer that investors piled on stocks with high relationship to rising rates while fled away from those with a negative relationship to them.
• HF Crowding and Short Interest landed in the top decile TTM, led exclusively by the short book. This implies that investors bet against unpopular longs and against unpopular shorts.

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.

• Developed Markets (DM) once again outshone Emerging Markets (EM), with this week's portfolio allocation showing 22% for DM and -21% for EM. On an ITD basis, DM reached the top quartile, whereas EM fell into the bottom quintile.
• The Developed Markets received a significant boost from the Europe & Middle East region, with substantial long allocations to Switzerland, France, Sweden, and other countries in this area together accounting for the entire 15% positive allocation to the region.
• In the Emerging Markets, Asia was the main contributor to the negative allocation, with China standing out as a significant negative outlier. This week, the allocation to China reached -51%, marking the lowest point in the last twelve months and placing it at the 1st percentile ITD, indicating one of its historically lowest allocations.
  

Regards,
David