Markets Rally on Slowing Inflation

Market Summary

US Market: 7/7/2023 - 7/13/2023

• US markets saw a strong rally this week led by the Nasdaq which finished the five trading days ending July 13th up 3.4%. The S&P and Dow followed at 2.2% and 1.4%, respectively.
• The June inflation report showed that the Consumer Price Index rose only 0.2% last month and 3% from one year prior which marked the lowest year-over-year number since March of 2021. The Nasdaq rose almost 3% during Wednesday and Thursday’s trading sessions.
• The value of Chinese exports dropped 12.4% in June according to Thursday’s trade report. The decline was the largest seen in China since February 2020. Exports from China to the US fell by 24%.

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

• Volatility picked back up in the US this week as the US Extreme Movers portfolio returned 14%. This week’s total return landed in the 61st percentile since 2007.
• Much of the volatility was attributable to macroeconomic stimuli so it’s no surprise that factor contribution to return reached the 70th percentile since 2007. Increased factor influence as Q2 earnings season kicks off could potentially impact price movements around earnings releases.

International Extreme Movers Volatility and Factor-Driven Speedometers

• It was another “Calm” week in international markets as the International Extreme Movers portfolio returned 13.3%, falling in the 34th percentile since inception.
• Factor contribution clocked in at 28.7% of the total return which was only slightly above the average when accounting for all weeks since 2007.

US Extreme Movers Portfolio Exposures

• This week's US portfolio was led by the Consumer Discretionary and Financials sectors, while Health Care and Consumer Staples crashed both placing well within the bottom decile since inception. Information Technology, which had been the biggest loser last week, rebounded with a long allocation of 1%.
• Consumer Discretionary's increase placed it in the 94th percentile since inception. The change was led primarily by Household Durables followed by Textiles, Apparel, & Luxury Goods, but all industries aside from Automobiles saw positive allocation.
• Almost two-thirds of Health Care’s short allocation was attributed to the Health Care Providers & Services and Biotechnology industries, at -9% and -7% respectively. Consumer Staples had negative allocations to all industries this week but were particularly driven by Food Products and Beverages at -9% and -6% respectively.
• The rebound in Information Technology was thanks to significant reversals in both Software and Semiconductors.

• Beta and Volatility reverted from last week’s slight negative exposures to strong positive exposures, with several Beta and Volatility factors landing in the top quintile TTM.
• The portfolio saw positive exposures to growth on both sides of the book, suggesting investors were in favor of growth-behaving names and against anti-growth ones.
• Quality pushed further negative, with Earnings Quality and Management Quality factors landing in the bottom quintile since inception. This largely came from the long side of the book, suggesting that investors were in favor of low-quality names.
• Interest Rate Beta and Oil Beta were both slightly negative, suggesting that investors avoided stocks with a positive relationship to rising Interest Rates and Oil this week.
• The negative exposure from HF Crowding continued to come from the short book, implying that investors avoided popular longs over the week. In contrast, Short Interest had a positive allocation in the top decile since inception, which came from the long book.

International Extreme Movers Portfolio Exposures

• Similar to the US portfolio, Materials, Financials, and Consumer Discretionary were the top sector allocations this week, each landing in the top quartile TTM and ITD.
• The Materials allocation was led by the Chemicals and Metals & Mining industries at 5.43% each. Financials was led almost exclusively by Banks, particularly in Europe.
• Information Technology led the negative allocations at -10%, landing in the bottom quintile TTM and bottom decile ITD. Electronic Equipment and Semiconductors were responsible.
• Communication Services reverted to positive this week, but the allocation still landed in the bottom quartile since inception. Interactive Media Services led the long allocation at 3.8%.

• This week’s International Portfolio saw negative exposure to Volatility and positive exposure to Beta, both driven primarily by the short book. This suggests that investors bet against high-vol names while also betting against anti-beta names.
• Exposure to Value turned negative, led again by the short book. This suggests that investors bet largely against high-value names.
• Interest Rate Beta was positive on both sides of the book, landing near the top quartile TTM. This implies that investors leaned into stocks with positive relationships to rates and bet against stocks with the inverse relationship.
• Short Interest exposure landed in the top decile TTM and was driven overwhelmingly by the short book, while HF Crowding exposure turned negative and came from both sides of the book. The former suggests that investors bet heavily against unpopular shorts, while the latter suggests that investors bought unpopular longs and bet against popular crowded longs.

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.

• Emerging Markets saw a strong negative allocation, which placed it near the bottom decile on a TTM and ITD basis. This allocation was led by EM Asia, driven overwhelmingly by China, though Taiwan and Thailand both had allocations landing in the bottom decile TTM and since inception.
• The Europe & Middle East region was exclusively responsible for the long allocation in Developed Markets. Sweden led the group at 7%, but all nations within the region contributed to this positive allocation. The Americas & Pacific both had negative allocations, with Hong Kong notably seeing a -5% exposure that was in the bottom decile TTM and ITD.

Regards,
Reshma