Markets Remain Risk-On Despite Economic Uncertainty

Market Summary

US Market: 6/2/2023 - 6/8/2023

• The Dow Jones Industrial Average led US headline indices in another strong week, finishing at 2.3% for the week ending June 8th. The S&P followed at just under 2%, and the Nasdaq came in at 1.6%.
• US jobless claims surged more than expected for the week ended June 3, totaling 261,000 and coming in as the highest weekly rate since October 30, 2021.
• Markets are expecting the Fed to skip a rate hike next week as a result of the jobless claims data, with the probability of no hike jumping to 73.6% following the announcement as compared to 65% prior.
• Short-maturity treasury yields were up this week, approaching their highest levels since March. This signaled investors' doubt around future Federal Reserve rate cuts amidst elevated inflation concerns and hawkish central bank actions globally.

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 posted a return of 22.9% this week, classifying the week as “Very Volatile”. The return landed in the 91st percentile of all weeks since January 2007.
• This week’s environment continued to be “Very Factor-Driven,” as factors accounted for almost half the portfolio’s return. Factor’s contribution to return fell in the 95th percentile since portfolio inception.
• Markets that are both “Very Volatile” and “Very Factor-Driven” tend to provide the most challenging landscape for fundamental stock-pickers. These categorizations point to the fact that stock prices are moving dramatically but are moving as a result of macro forces rather than idiosyncratic alpha.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The international markets were slightly more volatile this week, with the International Extreme Movers portfolio returning 16.4%. The return landed in the 67th percentile of all weeks since portfolio inception.
• Factors drove 34% of the portfolio’s return, falling in the 76th percentile since inception. This marks the third consecutive week that the ex-US environment has been “Factor-Driven”.

US Extreme Movers Portfolio Exposures

• The sector composition of the US portfolio pointed to a reversal in flows week-over-week. Information Technology accounted for a 45% net short allocation just a week after a 64% long allocation. Software was again the key industry driver at a -26% allocation.
• The long allocations to Financials, Consumer Discretionary, and Industrials all landed in their top deciles since inception. Consumer Discretionary’s week-over-week swing was largely due to Durables & Apparel and Distribution & Retail.

• Beta and Volatility exposures remained elevated in the US this week. The “risk on” indication from beta and volatility factors has been persistent since the beginning of May.
• From a style perspective, that is where the week-over-week similarities ended. Given the strong repositioning away from tech and toward Financials, Growth fell out of favor and was replaced by Value. Dividend Yield and Earnings Yield factors landed well into their top deciles and Axioma’s Dividend Yield factor exposure climbed to its highest level in over a year.
• The sector rotation also resulted in a macro re-alignment as well as Interest Rate Beta and Oil Beta flipped to strong positive exposures.
• The US portfolio was long popular hedge fund shorts and short popular hedge fund longs which likely created challenges for hedge fund investors on both sides of their books.

International Extreme Movers Portfolio Exposures

• The International sector story was similar to that of the US this week despite differing in magnitude. Information Technology held the largest short allocation while Consumer Discretionary was the biggest long allocation.
• Semiconductors in China, Japan, and Hong Kong made up more than half of the short allocation to tech while Automobiles & Components in Hong Kong drove the long allocation to Consumer Discretionary.

• The International portfolio moved into positive territory in Beta and Volatility factors this week which points to stronger risk appetite in the international markets.
• Like its US counterpart, Value was certainly in favor over Growth due, in large part, to the portfolio’s short allocation to Information Technology.
• With that move to Value, Oil and Interest Rate-sensitive stocks came into favor over stocks that tend to have inverse relationships with Oil and Rates.
• The International portfolio was short popular hedge fund shorts which likely benefitted the short side of hedge fund manager books.

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.

• The International Extreme Movers portfolio favored Emerging Markets this week as the 11% long allocation to EM landed in the 65th percentile since inception.
• Within Emerging Markets, the most extreme allocations were a 15% allocation to Brazil and a -9% allocation to China. Brazilian Utilities and Energy stocks were particularly in favor while Industrials stocks led the short allocation to China.

Regards,
Reshma

‍