Markets Slump After Fed Inflation Concerns

Market Summary

US Market: 12/13/2024 - 12/19/2024

• All three major U.S. headline indices declined this week, with the Dow Jones Industrial Average experiencing the steepest drop, falling by 3.58%. The S&P 500 followed, posting a weekly loss of 3.04%, while the Nasdaq Composite fared slightly better but still recorded a decline of 2.66%.
• Concerns over persistent inflation prompted a significant drop in U.S. markets, as expectations shifted toward fewer interest rate cuts in 2025 than previously anticipated. While markets saw a slight rebound following Wednesday's selloff, they remain firmly in negative territory for the week.
• The euro strengthened against the U.S. dollar after President-elect Trump threatened to impose tariffs on the EU if its member countries do not purchase oil and gas from the U.S. Investors are optimistic that the EU will successfully meet these demands, thereby avoiding the tariffs.

Extreme Movers Portfolio Performance

Note: Extreme Movers definitions can be found in the Factor University section on our website.

US Extreme Moves Volatility and Factor-Driven Speedometer

• The US Extreme Movers portfolio delivered a 13.7% return this week, placing it in the 31st percentile for the trailing twelve months and the 58th percentile since inception. This performance lands in the “Neutral” for the week.
• Factors contributed 20.3% to the total return, placing it in the 37th percentile for both since inception and the trailing twelve months. This factor return is classified as “Alpha-Driven.”

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers portfolio posted a 15.1% return last week, earning a “Neutral” classification. This performance ranks it in the 41st percentile for the trailing twelve months and the 35th percentile since inception.
• Factors contributed 38.4% to the total return, ranking in the 90th percentile for the trailing twelve months and the 88th percentile since inception. This level of factor return qualifies as “Very Factor-Driven.”

US Extreme Movers Portfolio Exposures

• Health Care had the largest allocation in the US portfolio this week, placing in the 87th and 84th percentile over the trailing twelve month (TTM) and inception-to-date (ITD) periods. Pharmaceuticals drove much of this allocation at 5%.
• Consumer Staples maintained a strong allocation in the US portfolio, rising to 10% this week and placing in the 93rd percentile for both the TTM and ITD periods. Household Products was the highest industry at 4%.
• Materials was the lowest sector, declining further to a -15% allocation, and landing in the 2nd percentile for both TTM and ITD. All industries were negative, with Metals & Mining driving the most at -9%.
• Industrials was another weak sector, with a -11% allocation this week, ranking in the 13th percentile TTM and just the 11th percentile ITD. Building Products was the largest detractor within the sector at -7%.

• Beta and Volatility factors were notably negative this week, with Wolfe’s Volatility declining to -0.99, Axioma’s Market Sensitivity dropping to -0.78, and Barra’s Beta declining to -0.66. These all ranked at or below the 20th percentile TTM and ITD. These declines were generally driven by the short book, suggesting that investors sold high-beta and high-vol stocks.
• Quality factors were strongly in favor, led by Barra’s Earnings Quality at 0.41 and Management Quality at 0.31, placing in the 90th and 89th percentiles TTM respectively. The increase in exposure to Quality was driven by the short book across all models, indicating that investors were selling low quality names.
• Macro factors remained negative, with Wolfe’s Interest Rate Beta increasing slightly to -0.13 (36th percentile TTM) but Oil Beta declining further to -0.49 (15th percentile TTM). The negative Interest Rate Beta was mainly due to the short book, as investors sold names that benefit from rising rates. Investors were again selling high-oil-beta names and buying low-oil-beta names, suggesting a continued bet against rising oil prices.
• Crowding factors showed mixed trends, with ETF Flow rising to 0.26 (77th percentile TTM) while Short Interest dropped to -0.23 (45th percentile TTM), which was due mainly to investors selling popular shorts. Hedge fund crowding turned positive at 0.16 (61st percentile TTM), reflecting renewed interest in popular long positions.

International Extreme Movers Portfolio Exposures

• Information Technology emerged as the top sector this week with a 14% allocation, placing in the 89th percentile TTM and the 95th percentile ITD. This marks a significant rise from last week, with Software and Semiconductors leading the way at 9% and Taiwan having the highest country exposure at 8%.
• Consumer Discretionary remained strong at 11%, ranking in the 94th percentile TTM and 92nd percentile ITD. Automobiles and Retail was the largest contributor to this allocation at 5%.
• Industrials saw a notable recovery to 8%, rising from negative territory last week. The sector placed in the 75th percentile TTM and 86th percentile ITD. South Korea (5%) and Hong Kong (4%) led the recovery.
• Materials fell sharply and recorded the lowest allocation this week at -24%, the largest drop of any sector, ranking in the 1st percentile for TTM and 3rd for ITD. Metals & Mining drove almost all of the decline at -20%.

• Quality factors continued to dominate, with Barra’s Profitability at 0.28 (97th percentile TTM) and Investment Quality improving to 0.20 (88th percentile TTM). These increases were driven by the short book and indicate a strong preference for selling low-quality investments across the portfolio.
• Beta and Volatility factors showed mixed performance this week. Barra’s Beta rose to 0.23, placing in the 80th percentile TTM and 67th ITD. However, Axioma’s Market Sensitivity turned negative at -0.15, ranking in the 41st percentile TTM.
• Growth factors were mixed overall. Axioma’s Growth was very strong at 0.21, reaching the 92nd percentile TTM and 80th ITD, while Barra’s Growth declined to -0.16, which was in the 24th percentile for the TTM and 19th ITD. The two models diverged on Materials, with the uptick for Axioma being primarily driven by short positions in Real Estate and Materials, while the decline for Barra was also attributed largely to the Materials short position.
• Macro and Crowding factors were mixed. Wolfe’s Oil Beta fell sharply to -0.24 (18th percentile TTM) as investors looked to sell high-oil-beta names. Meanwhile, Hedge Fund Crowding turned positive at 0.10, ranking in the 68th percentile TTM and 67th ITD, mainly due to investor’s desire to sell unpopular hedge fund longs.

International Extreme Movers Portfolio Country Exposures

This 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 remained positive with a 9% allocation this week, placing in the 65th percentile TTM and the 62nd percentile ITD. Developed Markets saw a -9% allocation, ranking in the 28th percentile TTM and 31st ITD.
• Asia was the key driver within Emerging Markets, with Korea leading at 18%, ranking in the 95th percentile TTM and 97th ITD. Americas showed a steep decline, with Brazil dropping to -23%, placing in the 0th percentile TTM and 1st percentile ITD. This was the largest negative move of any country, significantly weighing on the overall Emerging Markets allocation.
• Within Developed Markets, the Pacific region contributed the most, with Japan increasing to 3%, in the 54th percentile TTM and 56th ITD. Europe & Middle East maintained stability, with Israel and Italy at 2% and 1%, respectively, both ranking in the top quartile for TTM. Canada notably saw its lowest position over the trailing-twelve-months at -12%.

Regards,

Colin