Market Sentiment Shifts as Fed Rate Cut Expectations are Deferred

Market Summary

US Market: 5/17/2024 - 5/23/2024

• After several weeks of positive performance, this week saw a downturn for the major US headline indices. The Nasdaq led with a modest gain of 0.23% over the five trading days ending on Thursday. The S&P 500 followed, posting a slight decline of -0.55%. Lastly, the Dow experienced the most significant drop, with a return of -2.02%.
• US investors pushed back on expectations for the Fed's first interest rate cuts, shifting market sentiment and impacting stocks both domestically and globally. As a result, the US dollar strengthened, and Treasury yields rose this week.
• Raphael Bostic, President of the Federal Reserve Bank of Atlanta, suggested that interest rates might remain elevated for an extended period. He noted that monetary policy has been less effective in slowing economic growth compared to previous cycles, as evidenced by stronger-than-expected US business activity data.

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

• This week, the US Extreme Movers portfolio posted a return of 14.5%, categorizing it as "Volatile." This performance ranks in the 65th percentile since the portfolio's inception in 2007.
• Factors contributed to 17.3% of the total portfolio’s performance, placing it in the “Alpha Driven” category. This return ranks in the 27th percentile since the portfolio's inception.
• Weeks that are both volatile and very alpha-driven are advantageous for fundamental investors, as stock prices are moving strongly due to idiosyncratic changes rather than common, systematic factors.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers portfolio achieved a return of 16.1%, categorizing it as volatile. This week's performance places it in the 65th percentile since its inception.
• Factors contributed to 15.1% of the total returns, earning the "Very Alpha-Driven" classification. This performance ranks in the 2nd percentile on a trailing twelve-month basis.

US Extreme Movers Portfolio Exposures

• Information Technology was the top sector again this week, doubling its share of the portfolio with a 19% allocation that landed in the top quintile on a trailing twelve-month (TTM) and since-inception basis. Semiconductors were the main driver of this, making up the largest industry concentration in the portfolio at 12%.
• Financials bounced back to a positive 9% allocation after landing in the bottom quintile TTM last week. The shift was driven largely by Insurance, which was the second largest industry concentration in the portfolio at 9%.
• Consumer Discretionary and Industrials were the bottom sectors this week, with Industrials dropping to the 15th percentile on a TTM basis due to a large negative allocation to Transportation. Consumer Discretionary saw it’s worst week over the trailing twelve months with a -22% allocation that was driven by a combination of Specialty Retail and Household Durables.

• Beta factors swung strongly negative this week, with indicators landing in the bottom quartile since inception. Volatility factors on the other hand remained high, indicating that investors still had some risk appetite. Much of the long Volatility exposure was driven by Health Care, while the negative Beta was driven by the large short in Consumer Discretionary as well as long anti-beta names in the Financials sector.
• Value factors were mildly negative and were driven primarily by the long book. This suggests that investors leaned into names with lower Dividend Yields and Earnings Yields. Growth on the other hand was driven primarily by the short book, as investors fled from low-growth names.
• HF Crowding and Short Interest were both negative, landing in the bottom quintile since inception. The negative crowding exposure was driven largely by investors shorting popular Consumer Discretionary and Industrials names, while the negative short interest came primarily from Communication Services and Real Estate.

International Extreme Movers Portfolio Exposures

• Financials led the International portfolio this week, with an 8% allocation that landed in the 72nd percentile both TTM and ITD. Banks and Insurance drove this exposure, with 5% allocations each.
• Information Technology was not far behind, swinging from last week’s -7% position to a positive 7% allocation that landed in the 73rd percentile TTM. The change was driven by Semiconductors as well as Technology Hardware, Storage & Peripherals.
• Health Care and Consumer Discretionary were the bottom sectors, both landing in the bottom decile TTM. All industries had negative allocations within Health Care, though Life Sciences and Healthcare Providers & Services were the main contributors. Consumer Discretionary was driven by a combination of Consumer Services and Consumer Durables & Apparel.
• Industrials also dropped to the bottom of the portfolio this week, with a -7% allocation that landed in just the 10th percentile TTM. The allocation was overwhelmingly driven by Capital Goods, which saw a -9% allocation.

• Similar to the US portfolio, Volatility factors were in favor (landing near the top quartile TTM), while Beta factors were out of favor (landing in the bottom quintile TTM). The positive Volatility exposure came from investors taking on risk on the long side of the book, particularly within Tech, Real Estate, and Financials. Beta was also driven by the long book, as investors preferred anti-beta names within Financials and Energy.
• Value factors were even more in favor this week, with all factors landing in the top decile TTM. Both the long and short sides of the book contributed to this, suggesting that investors favored cheaper stocks on the long side, while also shorting expensive stocks.
• HF Crowding and Short Interest factors remained high this week, with both landing in the top quintile TTM. Crowding was driven by the short book, suggesting that investors fled from unpopular names. Short Interest was also mostly driven by the short book, suggesting that investors bet against names inversely correlated to popular 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 were strongly out of favor this week, with a -28% allocation that ranked in just the 12th percentile TTM and ITD. Emerging Markets, on the other hand, swung to the long side of the book with a positive 28% allocation that reached the 85th percentile TTM.
• The Pacific region drove much of the Developed Markets exposure, closely followed by the Europe & Middle East, with both seeing allocations that ranked in the bottom quintile TTM. Japan and Germany were the largest individual country contributors, at -12% and -7% respectively.
• Asia overwhelmingly drove the Emerging Markets exposure with an allocation of 29% that was driven by both India and China. Turkey was also a notably large contributor, with a 7% allocation that ranked in the top decile both TTM and ITD.

Regards,
Jose