Post-Election Markets Soar Spurred by Fed Cuts

Market Summary

US Market: 11/1/2024 - 11/7/2024

• US headline indices saw significant gains this week. The Nasdaq was up the most, earning 6.4% over the five trading days ending Thursday. The Dow came in second at 4.8%, closely followed by the S&P 500 at 4.7%.
• US stocks hit new record highs this week, particularly within small cap stocks and regional banks that are expected to benefit under a Trump administration. Other asset classes have shown tapering fervor, with the dollar reversing most of its post-election rally as investors question whether Trump’s extensive tariff proposals will come to fruition.
• The Federal Reserve approved a 25 bp rate cut on Thursday, with a unanimous vote that puts the benchmark rate at a target range of 4.50 - 4.75%. This marks the second consecutive cut this year, as Fed officials says that supporting employment has become as much a priority as calming inflation.

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 Speedometers

• The U.S. Extreme Movers portfolio returned 25.9% this week, placing it in the 98th percentile over the past twelve months and 94th percentile since inception. This level of performance marks the week as "Very Volatile."
• Factors accounted for 20.7% of the total returns this week, landing in the 39th percentile for trailing twelve months and 38th percentile since the portfolio’s inception. This level of factor return puts this week in the “Alpha-Driven” category.
• Markets that are both very volatile and alpha-driven can provide great opportunities for fundamental managers, as there are strong returns that are driven by stock-specific moves, rather than systematic market forces.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers portfolio achieved a return of 17.1% this week, ranking in the 75th percentile over the past twelve months and the 72nd percentile since its inception. This performance classifies the week as “Volatile.”
• Factor returns accounted for 20.5% of the portfolio's total performance, categorizing it as “Alpha-Driven.” This level of factor return places the week in the 35th percentile over the past twelve months and the 22nd percentile since inception.
• Markets that are both volatile and alpha-driven can provide ample opportunities for fundamental managers, as there are strong returns available that are driven by stock-specific moves instead of systematic market forces.

US Extreme Movers Portfolio Exposures

• Financials rose this week as the most represented sector with a 26% allocation. This places this sector in the 94th percentile for trailing twelve months and 96th percentile since inception. All industries within this sector contributed positively with Banks was the mot significant accounting for 14% alone.
• The Industrials sector was the second most represented with an 8% allocation, placing it in the 80th percentile over the trailing twelve months. This positioning was primarily driven by the long book, which contributed by 20%, while the short book detracted with a negative contribution of -12%.
• Real estate fell with a -13% allocation, placing in the 3rd percentile for trailing twelve months and 9th percentile since inception. All industries within this sector contributed to this short position, however Specialized REITs was the most significant as it contributed by -7% alone.

• Growth factors continue to be in favor this week, especially for Barra’s Growth which fell in the top decile of the data for both trailing twelve months and since inception. The main driver of this allocation as the short book of the portfolio. Indicating that US investors decided to bet against names with low exposures to the Growth factors.
• Macro factors performed favorably this week. Interest Rates Beta reached the 96th percentile for the trailing twelve months and the 85th percentile since inception, with both the long and short books contributing positively. The 14% allocation to Banks provided the largest boost. Oil Beta also ranked highly, landing in the 95th percentile since inception and the 78th percentile over the trailing twelve months, with contributions from both the long and short books.
• Value factors were mixed this week. Dividend Yield factors remained relatively flat, registering around the 50th percentile for Wolfe and approaching the bottom third for both Barra and Axioma. In contrast, Earnings Yield factors ranked highly, with Wolfe’s Earnings Yield reaching the 86th percentile on both an inception-to-date and trailing twelve-month basis. Both the long and short positions contributed to this allocation, with the short positions having a more significant impact.

International Extreme Movers Portfolio Exposures

• Similar to the US portfolio, Financials was the most represented sector this week for the International Portfolio with a 12% allocation, This places this sector in the 82nd percentile for trailing twelve months and 81st percentile since inception. Capital Markets was the most represented industry within this sector accounting for 9% alone.
• Industrials remained the second-largest sector this week, with a 6% allocation, positioning it in the 80th percentile since inception. Within this sector, Marine Transportation and Trading Companies & Distribution were the leading industries, each contributing approximately 2.5%.
• Consumer Discretionary declined from -2% last week to -6% this week, making it the least represented sector. This places it in the 16th percentile over the trailing twelve months and the 19th percentile since the portfolio’s inception. Automobiles was the primary driver of this short allocation, accounting for -4.5% on its own.

• Beta and Volatility factors showed mixed results this week. Beta and Market Sensitivity remained subdued, with Beta landing near the mean both inception-to-date and over the trailing twelve months, while Market Sensitivity fell into the bottom third of the data. In contrast, Residual Volatility and Volatility were favorable, ranking in the top decile for both inception-to-date and trailing twelve months. This exposure was primarily driven by the long positions, while the short positions contributed negatively, indicating that investors held long positions in names with high residual volatility.
• Value factors showed a slight positive tilt this week, with all factors landing above the mean on both an inception-to-date and trailing twelve-month basis. Axioma’s Barra factor placed in the 60th percentile since the portfolio’s inception. The long and short books moved in opposite directions, with the long book primarily driving this exposure, suggesting that investors held significant long positions in high-value names, while also shorting high-value names but to a lesser extent. Earnings Yield for Barra reached the 73rd percentile since inception, driven primarily by the short book.
• Macro factors were favorable this week, with Oil Beta reaching the 86th percentile over the trailing twelve months. Interest Rates Beta also performed well, landing in the 97th percentile for the same period. Both the long and short books contributed to these exposures.

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 were favored this week with a 31% allocation, placing the sector in the 86th percentile both since the portfolio’s inception and over the trailing twelve months. In contrast, Developed Markets had a -31% allocation, positioning it in the 12th percentile for the trailing twelve months and the 11th percentile since the portfolio’s inception.
• Within Emerging Markets, Asia was the most represented region with a 34% allocation, placing it in the 91st percentile since the portfolio’s inception. China was the dominant country within the region, accounting for 34% alone, while India was the second-largest, accounting for 8%.
• In Developed Markets, Europe & the Middle East was the most significant region, with a -32% allocation, placing it in the 6th percentile for the trailing twelve months. Germany, the United Kingdom, and France were the most significant countries within the region, with allocations of -7%, -5%, and -4%, respectively.

Regards,

Jose