Market Sentiment Positive Despite Inflation

Market Summary

US Market: 2/9/2024 - 2/15/2024

• All major US indices showed moderately positive returns this week. The Nasdaq posted a performance of 0.71% followed by the S&P and the Dow at 0.64% and 0.12%, respectively.
• On Tuesday, markets declined as the Consumer Price Index showed a 0.3% increase in January which was higher than the 0.2% consensus. Markets recovered considerably in Wednesday’s trading session.
• Global stock markets have surged to two-year highs, with the Nikkei approaching record levels and the Bank of Japan signaling an end to negative interest rates. Concurrently, the Hang Seng is experiencing gains in anticipation of China's imminent reopening.

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 experienced a return of 19.6% over the week, placing it in the top quintile for inception-to-date (ITD) performance and classifying the period as “Very Volatile”.
• Factor Volatility fell to 14.2% this week, landing in the bottom quintile ITD this earning the classification of “Very Alpha Driven”.

International Extreme Movers Volatility and Factor-Driven Speedometers

• Ex-US volatility fell to 14.7%, which shows a big change with a weekly delta of -3.9%. This week’s volatility falls into the “Neutral” category, ranking it in the middle quintile ITD.
• Similar to last week, volatility was driven by Alpha, with only 19.1% of the weekly volatility coming from Factors, placing this week in the bottom quintile ITD and receiving the classification of “Very Alpha Driven”.

US Extreme Movers Portfolio Exposures

• The Consumer Discretionary sector jumped to the largest long allocation in the US portfolio this week. Consumer Durables accounted for 10% of the 12% position which landed in the 88th percentile on a trailing-twelve-month basis.
• Consumer Staples, on the other hand, represented the largest short allocation. The 10% short marked the 7th percentile since inception and was concentrated in Food, Beverages, & Tobacco.
• Semiconductors & Semiconductor Equipment accounted for 8% of the 9% long allocation to Information Technology while Software & Services and Technology Hardware & Equipment were generally neutral.

• Beta and residual volatility factors became elevated this week which points to investors’ willingness to take on risk. All residual volatility factors fell in the top quintile on a trailing-twelve-month basis.
• Like last week, investors continued to favor growth stocks over value stocks but also turned away from quality as well. The key drivers of this positioning were the long allocation to Software & Services and the short allocation to Food, Beverages, & Tobacco.
• Short Interest reached the 85th percentile since inception while HF Crowding moved down to the 11th TTM percentile. This indicates that popular hedge fund shorts were rallying while popular longs were struggling which likely caused challenges for hedge fund managers.

International Extreme Movers Portfolio Exposures

• Financials was the largest long allocation in the ex-US portfolio at 13% which fell in the 86th percentile on a trailing-twelve-month basis. Banks accounted for 8% of that allocation.
• Metals & Mining stocks drove the significant short allocation to Materials which reached the 4th percentile over the last twelve months. Stocks in South Africa, Japan, and Canada were the leading contributors.
• Semiconductor & Semiconductor Equipment stocks in Asia rallied this week as evidenced by a 6% long allocation to the industry. The 11% long allocation to Information Technology marked the 89th percentile since inception.

• While beta, residual volatility, and growth factors were relatively quiet in international markets this week, value factors were heavily out of favor. Both Axioma and Barra’s Value factors landed in the bottom decile on a trailing-twelve-month basis while Axioma’s Dividend Yield factor exposure came it at its 4th percentile.
• As we saw in the US, the International portfolio also pointed to heavier headwinds against hedge fund managers. With elevated levels of Short Interest Exposure and negative HF Crowding exposure, managers were likely facing de-risking pressure across the board.
• The short allocation to Materials and the long allocation to Financials showed an alignment of investors to rising rates. Wolfe’s Interest Rate Beta factor moved from a negative allocation last week to positive which is likely a reaction to persistent inflation and a continued high rate environment.

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.

• After last week’s disparity between Emerging and Developed Markets, the dynamic settled with just a 9% long allocation to Emerging Markets this week.
• Much of the short EM allocation was driven in the Americas region, particularly in Brazil, where all sectors struggled. Health Care was the largest sector contributor.
• Saudi Arabia reached its highest ever long allocation at 7%, while Turkey landed in the 89th percentile since inception. EMEA was the only regional long allocation in Emerging Markets.
• Japan accounted for an 11% short allocation this week, though there were positive allocations in Health Care, Financials, Information Technology, and Communication Services.

Regards,
Jose