Rising Oil and a Government Shutdown Fuel Investors’ Declining Sentiment

Market Summary

US Market: 9/22/2023 - 9/28/2023

• US Headline Indices finished the week in the red following a drastic single day drop of 1.41% on Tuesday. The Nasdaq finished the week just above the surface, at 0.06%, while the S&P and the Dow struggled with weekly returns of -0.70% and -1.19%, respectively.
• A Government shutdown seems inevitable in the near-term, pending a resolution from congress negotiations regarding government budgets for the upcoming period. Despite this, many economists suggest that the government shutdown should have little to no impact on the US Stock markets due to delayed economic data.
• Oil prices remained high throughout the week. The combination of reduced demand due to these high prices and one of the lowest levels of emergency crude reserves in recent US history has left Wall Street uncertain about the future trajectory of oil prices.

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 14.0%, placing it just beyond the "Neutral" and into the "Volatile" category. This volatility is at the 27th percentile TTM and the 61st percentile ITD.
• Factors accounted for 30.9% of the overall volatility, designating this week as "Factor-Driven" and ranking it at the 71st percentile ITD. Notably, industry factors made up two-thirds of this factor volatility.

International Extreme Movers Volatility and Factor-Driven Speedometers

• International markets landed very close to its historical mean in terms of volatility. The 14.6% return sits exactly at the 50th percentile TTM at the 48th percentile ITD, which categorizes the week as “Neutral”.
• Factor contribution was exceptionally high this week, with the 44.4% standing at the 96th percentile for both TTM and ITD metrics. In this "Very Factor-Driven" scenario, country factors played a dominant role, accounting for over half of the total factor impact.

US Extreme Movers Portfolio Exposures

• Oil, Gas, & Consumable Fuels led Energy’s 24% allocation this week amid surging oil prices. The long allocation landed in the 98th percentile on a trailing-twelve-month basis.
• Real Estate fell heavily out of favor across all industries, reaching its largest short allocation since the banking crisis in March 2023. The -22% allocation hit the 3rd percentile since inception.
• Biotech and Trading Companies & Distributors led the long allocations to Health Care and Industrials, respectively.

• Exposures to beta and residual volatility factors generally moved closer to neutral relative to last week as the US portfolio dropped its value posture for more of a Growth at a Reasonable Price positioning. The long allocation to Energy drove the positive exposures to both Growth and Earnings Yield factors.
• It’s no surprise to see that the most significant exposure of the week was Oil Beta. The 1.1 exposure landed in the 98th percentile on a trailing-twelve-month basis and the 92nd percentile on an inception-to-date basis.
• Positive exposures to Management Quality and Profitability factors were consequences of the short book this week as investors sold lower quality stocks in Real Estate and Financials.
• Popular hedge fund long stocks in Biotech rallied which led to a strong positive exposure to Wolfe’s Hedge Fund Crowding factor.

International Extreme Movers Portfolio Exposures

• China contributed the majority of the 9% long allocation to Information Technology in the international portfolio. Chinese Semiconductors accounted for about one third of the total tech position.
• Metals & Mining stocks had a dramatic week-over-week reversal. The portfolio held an 11% short allocation this week after a 13% long allocation the week prior. This reversal was driven by stocks in Canada, South Africa, and South Korea.
• Banks claimed a 9% long allocation while the rest of the Financials industries remained quiet. Insurance and Capital Markets showed short allocations of 1% each.

• Health Care and Information Technology stocks led a strong rally in residual volatility factors while positive allocations to Financials and Consumer Staples accounted for a severe aversion to beta.
• Value factors showed interesting dispersion this week. Earnings Yield was favored in the Banks industry while a long allocation to Biotech and a short allocation to Equity REITs kept traditional value factors in negative territory.
• While Oil Beta exposure increased in the international portfolio as it did in the US, the driving sector was Financials. The 0.44 exposure fell in the 90th percentile on a trailing-twelve-month basis.

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 and Emerging Markets flipped considerably week-over-week as Emerging Markets controlled a 44% long allocation. EM Asia was the favored region as the top three countries all claimed top decile allocations since inception.
• Europe & Middle East went from the largest regional long allocation last week to the largest short allocation this week. French and Italian stocks across all sectors contributed most of that swing.
• EM Americas was the only short region in Emerging Markets, led by low beta stocks in Brazil, Mexico, and Chile.

Regards,
David