Oil and the Fed Spur De-Risking

Market Summary

US Market: 9/15/2023 - 9/21/2023

• US headline indices struggled this week, particularly on Wednesday and Thursday. The Nasdaq was hit hardest, down 5.0% over the five trading days ending Thursday. The S&P and Dow followed at -3.9% and -2.4%, respectively.
• On Wednesday, the Fed confirmed it will again hold steady on rates but warned that there is likely to be at least another hike upcoming. Hopes of material cuts in 2024 were tempered as well as the Fed feels that higher rates must be maintained longer to combat inflation.
• Oil prices reached their highest levels since 2022 which further exacerbated investor fears of continued inflation and higher interest rates for the foreseeable future.

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 pointed to a return to neutrality this week by way of volatility. The portfolio’s 12.3% return fell in the 46th percentile since inception.
• Factor influence was also categorized as “Neutral” this week as factors accounted for 24.8% of the portfolio’s total return.

International Extreme Movers Volatility and Factor-Driven Speedometers

• International markets landed in “Calm” territory as the ex-US portfolio returned 12.8% this week. The total return places this week in the 25th percentile since inception.
• Factor contribution landed in the 33rd percentile since inception which categorizes this week as “Alpha-Driven”. Although alpha-driven markets are beneficial for fundamental stock-pickers, calmer volatility levels mean there was likely less opportunity for significant alpha returns.

US Extreme Movers Portfolio Exposures

• Financials remained strong, holding nearly the same weight and percentiles as the previous week. Insurance comprised 16% of the allocation.
• Utilities exposure fell to 2%, down from 26% the previous week. The allocation divides equally between Gas Utilities and Electric Utilities. This position ranks in the top third percentile for both TTM and ITD.
• Information Technology persisted in the red with a 12% short allocation, placing it in the bottom quintile percentile ITD. Semiconductors and Software led the sector's short allocation.
• Health Care ranked in the bottom quintile ITD, with Health Care Equipment & Supplies and Biotechnology contributing -5% and -4% to the allocation, respectively.

• This week's US Portfolio closely mirrored last week's, with most factor exposures consistent with the prior week's direction.
• Beta and Volatility Factors predominantly placed in the bottom decile ITD. While the short book primarily drove this, both sides of the book influenced these exposures.
• Value exposures held steady, whereas growth deepened its negative stance. According to the Axioma model, the exposure to growth hit its lowest on a TTM basis, indicating investors' preference for anti-growth stocks and aversion to growth-oriented ones.
• Interest Rate Beta persisted in its strength. Investors favored stocks inversely related to interest rates for short positions and those positively related for long positions, hinting at anticipated rate hikes in the near future.

International Extreme Movers Portfolio Exposures

• Materials saw strong representation in the long book, nearing the top decile ITD. Metals and Mining constituted a 15% allocation, with Paper & Forest Products trailing at 3.3%.
• The exposure to Utilities decreased but still remained strong, with its 6% allocation positioning it in the top quintile ITD. Much like its US equivalent, the segment was dominated by Electric and Gas Utilities.
• Information Technology's performance closely paralleled its US counterpart. Semiconductors and Software were primary contributors to its placement in the bottom decile ITD.
• Real Estate Management & Development was the sole contributor to the short position in Real Estate. Meanwhile, the majority of industries within Consumer Staples and Consumer Discretionary contributed negatively to those sector allocations.

• This week's style factor exposures for the international portfolio closely resemble those exhibited in last week's edition.
• Led by high volatility in short positions, the Volatility factor exposures stayed in the bottom decile ITD. Conversely, Beta factors neared the historical average, falling within the two central quartiles for both TTM and ITD.
• Exposures to Growth factors remained steady, while exposures to Value factors increased drastically reaching close to or at the 100th percentile levels ITD, with contributions from both sides of the book.
• HF Crowding saw increased exposures as investors piled on popular longs while avoiding unpopular ones.

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 overshadowed Emerging Markets, with all geographic sectors within DM seeing positive allocations. DM's position approached the top quintile ITD, whereas EM's stood in the bottom quintile ITD.
• Europe & Middle East dominated within DM, with Sweden's 6% long allocation marking its 95th percentile ITD. Japan stood out as the key driver for the 9% allocation to DM Pacific.
• In Emerging Markets, China stands out as the dominant force. Its substantial 24% short allocation significantly influenced the adverse positioning in EM Asia, which hit the bottom decile ITD.

Regards,
David