Macro-Sensitive Assets Come Back into Focus as High Beta Takes a Dive

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: 08/12/22 - 08/18/22

• Markets were mixed this week, with the Dow and S&P 500 sitting positive for the five days ending 8/18 and the Nasdaq ending relatively flat. Returns for the Dow and S&P 500 were in line at 2.0% and 1.8%, respectively. The Nasdaq was at -0.6%.
• Meme stock craze reared its head again this week, with retail traders driving up BBBY close to 300% throughout August, only to have the stock come crashing down on Thursday. Data from our partners at S3 Partners has shown the stock at extremely high risk for a short squeeze since August 2.
• The Inflation Reduction Act was officially signed into law; In addition to helping in the fight against inflation, the bill also doubles as one of the most significant acts of legislation in US history to support the fight against climate change.

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.

• US markets showed weak return dispersion, with this week’s return of 14.4% landing well below the YTD median as the 4th lowest this year.
• Alpha contribution slid this week relative to the prior week. However, sectors were in the spotlight, with industry contribution at the 4th highest level in 2022.
• Industry contribution was relatively concentrated in Retail, Insurance, Energy E&P.

• The international portfolio ticked up slightly this week but was still below the YTD median, with a return of 16.2%.
• Alpha contribution was just above the YTD median again this week.
• Country contribution increased relative to the prior week, though individual country contributions were relatively well diversified. Long positions in Taiwan & Japan and short positions in Sweden, UK, & Germany were among the most prominent country contributions.

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.

• Last week’s relatively neutral sector allocations were blown away with a heavy barbell this week, aligning with the observations of high industry contribution on the performance side.
• Consumer Discretionary, Financials, and Energy showed strong favor with heavy overweights in the portfolio. Driving these overweights were long positions in Retail, Insurance, and Energy E&P.
• Health Care and Information Technology were significantly out of favor this week.
• The remaining sectors showed general neutrality, with the allocations only ranging from 4% to -4%, as markets lacked sentiment in these segments.

• Style exposures strongly reversed course this week, with value, quality, and macro-sensitive assets leading the charge across all models.
• Beta-driven, high-growth assets swung out of favor, driven by the negative sentiment in Health Care and Information Technology.
• Despite renewed meme craze this week with the BBBY short squeeze, highly crowded shorts generally did not realize mass upward pressure. However, highly crowded longs saw downward pressure, likely due to renewed perception of increased market risk.

• The international portfolio saw far less extreme exposures this week, though we observe a barbell allocation similar to that of the US counterpart.
• Information Technology reversed course in a deviation from the US, with strong positive sentiment this week.
• Health Care and Materials fell sharply from last week, representing prominent short positions in this week’s portfolio.

• Similar to the US counterpart, beta was short this week, driven by positive sentiment around low beta names.
• International markets lacked a strong stance on Value and Growth, as these factors showed relatively neutral exposures. In contrast, Leverage and Quality factors were squarely favored this week across models.
• On the macro side, macro-driven assets saw continued uplift, especially those with high oil sensitivity.
• In a reversion from last week, international investors shied away from highly crowded longs and shorts.

Regards,
Alyx