Semiconductors Lead Gains as Interest Rate Cut Hopes Intensify

Market Summary

US Market: 3/1/2024 - 3/7/2024

• Major US headline indices saw mixed returns over the five trading days ending March 7th. The S&P 500 surged by 1.20%, followed closely by the Nasdaq which saw a rise of 1.13%. The Dow concluded the week down -0.53%.
• Federal Reserve Chair Jerome Powel hinted that the central bank is close to start lowering interest rates, boosting investor risk appetite. As a result, benchmark 10-year Treasury yields fell to one-month low levels.
• Predictions for US Employment Data indicate around 200,000 new jobs, notably fewer than January's 353,000. Differing forecasts from institutions such as RBC Capital Markets and Citigroup, projecting 260,000 and 145,000 new jobs respectively, may prompt market volatility upon the release of official figures.

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 saw a return of 19.0% over the week, slightly lower than last week’s return of 19.5%. This level of volatility sits in the top quintile since inception and categorizes the week as “Very Volatile”.
• Factors accounted for 14.3% of the total volatility, 10% of which was attributed to style factors and the remaining 90% to industry factors. This level of factor contribution classifies the week as “Very Alpha-Driven”, landing in the 14th percentile over the trailing twelve months.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers Portfolio returns rose to 17.4%. These levels of volatility landed in 75th percentile sin inception, categorizing the week as “Volatile”.
• Factors accounted for 23.3% of the total return, categorizing this week as “Alpha-Driven”. Industry was the biggest contributor to this week’s volatility at 36% followed by country and currency at 24% and 20% respectively.

US Extreme Movers Portfolio Exposures

• Information Technology was the top allocation this week, remaining close to its TTM mean at the 53rd percentile. Semiconductors accounted for 16% of the total sector allocation, while Software swung from last week’s positive position to a -14% allocation.
• Real Estate was the only sector to reach an allocation in the top quartile both on a TTM and ITD basis. The 5% overall allocation was driven mainly by Specialized REITs, contributing 4%.
• Consumer Discretionary tumbled from last weeks top allocation, landing in the bottom quintile TTM. Half of the -8% allocation was driven by Textiles, Apparel, & Luxury Goods. Hotels, Restaurants & Leisure was the only industry with positive allocation.
• Communication Services had the most negative allocation this week, landing in the lowest percentile TTM. The -14% short position was driven almost equally by both Media and Interactive Media & Services.

• Beta saw close-to neutral positive exposures similar to last week, while Volatility swung negative, nearing the bottom quintile TTM. The negative volatility was largely driven by negative contribution from the short book, implying that investors sold names with high volatility.
• Growth and Value switched places again this week as the portfolio became long value and short growth. The negative growth and positive dividend yield exposures came from both sides of the book, while the positive earnings yield exposure was mostly driven by the short book. This indicates that investors fled away from names with growth characteristics as well as avoiding anti-value names.
• Macro factors were positive this week due to contributions from the short book, indicating that investors sold names with negative relationships to interest rates and oil prices. HF Crowding and Short Interest both landed in negative territory, as investors sold both popular longs and popular shorts.

International Extreme Movers Portfolio Exposures

• Information Technology took the lead this week with a 15% allocation that placed in the top decile ITD. Similar to the US portfolio, Semiconductors & Semiconductor Equipment contributed most of this positive allocation with a weight of 8.56%. All other industries had positive allocations as well.
• Consumer Staples remained in the bottom quintile ITD with a short exposure of -7%. All industries within the sector contributed negatively to the allocation, led again by Beverages.
• Communication Services and Real Estate were the bottom sectors this week, both landing near the lowest percentile TTM and ITD. All industries contributed to the negative Communication Services allocation, while Real Estate was overwhelmingly driven by the Real Estate Management & Development industry.

• Beta and Volatility were both in slightly negative territory, though all indicators hovered near the TTM mean. The short book contributed mostly to the negative volatility exposure, while the long book contributed mostly to the negative beta exposure. This suggests that investors both favored anti-beta names and sold high-vol names.
• Value indicators were mixed, with Book-to-Price skewing very negative and Dividend and Earnings Yield skewing positive. Book to Price was driven primarily by the short book, suggesting investors sold high-value names. Growth was also mixed, with Barra showing negative exposure driven by investors selling high growth names, while Axioma showed positive exposure driven by investors buying high growth and selling low growth names.
• Oil Beta exposures landed in the top quartile ITD, while Interest Rate Beta saw positive exposures closer to the ITD mean. Both factors were positive on both sides of the book, but primarily driven by the long side, implying that investors favored names with a positive relationship to rising rates and oil prices.
• Short Interest and HF Crowding pushed further negative this week, both driven by long names as investors bought unpopular longs and unpopular shorts.

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 continued to skew towards Developed Markets this week, with a 9% long allocation representing the 59th percentile ITD. Emerging Markets saw a short allocation of -9%, placing it in the 34th percentile ITD.
• Within Developed Markets, the Pacific region had the highest contribution to the positive allocation at 10%, mostly led by Japan at 14%. This was offset by a negative allocation in the Europe & Middle East region, driven by France, Germany, and the UK, which all landed below the 30th percentile TTM.
• Emerging Markets was driven by Turkey with a -7% allocation. This was followed by Brazil at -4%. Asia was the only region with positive allocation, driven by China and India at 6% each.

Regards,
Reshma