Macro Factors are Driving Market Surprise

Markets exhibited more strange behavior this week as the war in Ukraine raged on, and the macroeconomic backdrop continued to drive investor sentiment. So this week, we continue to leverage our Surprise Indices to highlight market reaction to current global events. We’ll also extend our analysis to illustrate a practical example of using our Surprise Index framework, combined with additional datasets on the Omega Point platform, to find investment ideas to help hedge out risky exposures among the macro & geopolitical risk-driven environment.

Macro Drivers Persist

Macro drivers continue to persist as some of the top style surprises. This week, the Commodity and Oil factors edged out a bigger surprise, as investors continue to look for safety in commodities trades and oil hits record-breaking prices.

The reversal of the market unwind from two weeks ago slowed down this week, as expressed via the Wolfe HF Crowding and Short Interest factors. Though the Short Interest factor is still showing a cumulative surprise > 1.5, this measure is relatively flat compared to last week. US Growth rallied this past week while global Profitability saw downward pressure.

Industries Paint a Mixed Picture

Last week, we saw significant reversals at the industry level, some of which persisted this week. Independent Power and Renewable Electricity Producers in Developed Markets and Auto Components globally saw similar reversals as last week. However, several industries shifted back towards their initial trends. For example, Aerospace & Defense saw solid upward moves, presumably as investors prepared for further conflict in Ukraine. In contrast, Household and Personal Products saw downward shifts as interruptions in global trade continued to bring supply chain woes.

A Practical Use Case

Our practical analysis will use a proxy portfolio from Wolfe Research, which represents the most crowded US holdings across the hedge fund community. The portfolio is US-focused and ~40% net long.

This portfolio shows a sizeable negative predicted beta to the Surprise Index. We would expect this portfolio to face continued headwinds as we move deeper into the current market environment.

A decomposition of the predicted beta shows that the long side of the portfolio is driving the negative sensitivity. One option to improve this exposure is to look for short ideas to help hedge this risk.

As we’ve noted in past reviews of the macroeconomic environment, we can also use data from our partners at Quant Insight to highlight sensitivity to the Fed’s hawkish moves amid the battle against rising inflation. By overlaying relevant Quant Insight factors, we can see that our portfolio is also facing potential trouble from macroeconomic drivers.

The portfolio is well positioned based on the positive exposure to FED Rate Expectations. However, the negative exposure to the FED QT Expectations and USD 10Y Real Rate factors may present headwinds given the current inflationary environment.

To solve this, we can screen for names that have a negative beta to the Surprise Index and negative sensitivities to the Quant Insight factors to highlight short ideas that can act as a hedge for the portfolio.

Using Omega Point’s security screening tools, we screened US stocks with negative exposures to Surprise Index beta, FED QT Expectations, and USD 10Y Real Rates.

The combination of robust screening tools alongside turnkey access to a wide variety of topical factor datasets allows investors to identify adverse exposures and find ideas to mitigate risks quickly.

To see your portfolio’s exposure to the Surprise Index or any other factors mentioned above, please reach out to us!

US & Global Market Summary

US Market: 03/21/22 - 03/25/22

• The S&P 500 climbed 1.8%, extending its strongest 2-week run since late 2020, while the Nasdaq and Dow rose 2% and 0.3%, respectively.
• Fed Chair Powell stated that the central bank would be willing to be more aggressive raising interest rates to battle inflation.
• Russia's war in Ukraine remained in focus as President Joe Biden met with NATO allies in Europe, indicating that he would support removing Russia from the G20. The US also leveled new sanctions against Russia and vowed to provide more aid to Ukraine.
• Energy prices shot up with West Texas Intermediate crude futures closing 8.8% higher for the week.
• The 10-Year Treasury yield reached 2.5% Friday, its highest level since May 2019.
• First-time jobless claims last week reached the lowest tally since 1969, the Labor Department reported .
• Consumer confidence for March was below expectations, according to a University of Michigan survey.

Normalized Factor Returns: Axioma US Equity Risk Model (AXUS4-MH)

• Size finished atop the leaderboard for the second straight week, leaving extremely oversold terrain far back in the dust.
• Growth continued to climb but eased off its scorching run of late.
• Volatility eked up to sit at the doorstep of overbought territory.
• Value fell for the 9th week in-a-row and moved deeper into oversold territory.
• Earnings Yield finished in the red for for week # 11 (and counting..) to cap the bottom of this week’s leaderboard.
• U.S. Total Risk rose 0.06% this week.

Normalized Factor Returns: Axioma Worldwide Equity Risk Model (AXWW4-MH)

• Size saw a repeat at the top spot, blazing through oversold territory in record-breaking time.
• Growth resumed its upward tear and finished once again in the week #2 spot.
• Value continues to fall and moves closer towards extremely oversold terrain.
• Exchange Rate Sensitivity fall continues to take the bottom spot for the second straight week.
• Global Total Risk fell 0.06% this week.

Regards,
Alyx