Markets Bounce on Dovish Interest Rate News

Market Summary

US Market: 3/15/2024 - 3/21/2024

• US headline indices were unanimously up this week, led by the Dow with a return of 2.19% for the five trading days ending Thursday. The S&P 500 followed at 1.71%, with the Nasdaq trailing closely at 1.50%.
• The Fed’s announcement on Wednesday reaffirmed investors’ expectations for three interest rate cuts in 2024, spurring a rally in stocks that sent the S&P 500 to new highs. Dovish results from several other central bank meetings this week, including Switzerland and England, resulted in gains among global stocks as well.
• Apple’s stock saw a major slide Thursday, losing $113 billion in market cap, as the DOJ filed a lawsuit over Apple allegedly violating antitrust laws. This comes alongside reports that Apple will face heavy scrutiny from EU investigations around their Digital Markets Act, which could result in large fines for Apple and competitor Google.

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 returned 12.6%, classifying the week as “Neutral”. This was the lowest return seen since December of last year, falling in the 18th percentile over the trailing twelve months (TTM) and 48th percentile since inception.
• Factors contributed to only 16.4% of the total return, making this another “Alpha-Driven” week. Style factors accounted for only 38% of the factor contribution, with industry factors driving the majority of the factor volatility.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers Portfolio returned 15.0% this week, classifying it as a “Neutral” week as well. This return represented the 59th percentile TTM and 52nd percentile since inception.
• Factors were responsible for only 17.0% of the week’s return, categorizing this week as “Very-Alpha Driven”. Country factors alone accounted for half of the little factor contribution that was present, with industry factors contributing another third. Style and currency factors had minimal impact.

US Extreme Movers Portfolio Exposures

• Industrials saw the largest long allocation in the US Extreme Movers Portfolio this week. Capital Goods accounted for a 17% long position while Transportation stocks were slightly short at -3%. The net 14% allocation lands in the 92nd percentile since inception.
• Semiconductors & Semiconductor Equipment accounted for half of the 14% short allocation to the Information Technology sector. Tech, along with Health Care and Real Estate, fell into the bottom quintile of since-inception allocations.
• US Real Estate stocks struggled this week, coming in at a 9% short allocation which reached the 7th percentile on a trailing-twelve-month basis.

• Style factors were notably muted this week. Wolfe’s Earnings Yield factor was the only one which landed in the top or bottom quintile on an inception-to-date basis and Wolfe’s Oil Beta factor was the only one which landed in the top or bottom quintile on a trailing-twelve-month basis. This points to the fact that stocks in the US market were not being driven strongly by style factors.
• Though the exposures were less pronounced, investors continued to favor value and quality factors and demonstrate some risk aversion with underexposures to beta and residual volatility factors.
• Interest Rate Beta and Oil Beta exposures were positive which point to lingering rate and inflation uncertainty while HF Crowding landed in the 24th percentile on a TTM basis, pointing to slight downward price pressure on popular hedge fund long positions.

International Extreme Movers Portfolio Exposures

• The International Extreme Movers Portfolio demonstrated similar sector preferences to the US portfolio this week. Industrials nearly reached its top decile since inception with a 9% long allocation which was driven by a 12% allocation to Capital Goods.
• Health Care showed one of its largest short allocations we’ve seen, landing in the 2nd percentile on a TTM basis and 4th percentile since inception. Hong Kong stocks contributed the most significant portion of Health Care’s 11% short allocation.
• Unlike in the US, the Financials sector faced downward pressure in international markets. Insurance and Financial Services stocks accounted for the 5% short allocation, which fell in the 11th percentile over the trailing twelve months.

• Beta and residual volatility factors continued their week-over-week reversal trend as international investors favored stocks with lower levels of overall volatility. Beta factors from both Barra and Axioma fell into the bottom quartile on a trailing-twelve-month basis.
• The fundamental factors that were most in favor were Earnings Yield, Earnings Quality, and Investment Quality. The shift from last week points to investors selling stocks that are expensive relative to earnings that also have fundamental uncertainty. Most of this trade-off took place in Asia where short allocations to Hong Kong and Korea and a long allocation to Japan accounted for much of these exposures.
• Macro factors highlighted an alignment with stocks that tend to have a positive relationship with both interest rates and oil prices. All sectors contributed positively to these exposures which likely hints at the fact that these macro sensitivities were the catalysts for the sector moves.

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 preferred this week as the 14% long allocation landed in the 66th percentile on an inception-to-date basis.
• The Pacific region and, most notably, Japan, led the swing. Industrials, Real Estate, and Consumer Discretionary stocks drove a 24% long allocation which marks the 96th percentile on a trailing-twelve-month basis.
• In contrast, Emerging Markets Asia saw the most significant short allocation of the week. Real Estate and Financials stocks in South Korea, Taiwan, and China accounted for the majority of that allocation.

Regards,

Reshma