Soft Landing Hopes Lift Europe for the Holidays

Market Summary

US Market: 12/15/2023 - 12/21/2023

• The Nasdaq led US headline indices, returning 1.4% over the five trading days ending December 21st. The S&P 500 and the Dow followed at 0.6% and 0.4%, respectively.
• The US core Personal Consumption Expenditures index increased by 3.2% over last year which was slightly below the consensus of 3.3%. The PCE is a key measure for the Fed so the strong news boosted equity prices in Friday’s trading.
• UK headline inflation slowed much more sharply than expected in November. The inflation reading came in at 3.9% which was below the 4.3% consensus and was considerably lower than the 4.6% reading in October which has increased hopes of rate cuts in Europe in 2024.

Extreme Movers Portfolio Performance

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

US Extreme Movers Portfolio Exposures

• The Utilities sector saw one of its largest short allocations to date as a Electrical Utilities and Multi-Utilities drove a 20% short. That allocation fell in the 1st percentile on a trailing-twelve-month basis and the 3rd percentile since inception.
• Food Products stocks accounted for 9% of the 14% short allocation to Consumer Staples while Consumer Discretionary boasted a 9% long allocation. The 14% short allocation to Consumer Staples landed in the 3rd percentile since inception.
• While the sector allocation to Financials was only 1%, the underlying industry allocations were some of the largest in the portfolio. Capital Markets and Financial Services stocks combined for a 14% long allocation while Insurance and Banks combined for a 13% short allocation.

• The US portfolio maintained elevated exposures to beta factors as investors continue to look to capture the strong bull rally. All beta factor exposures landed in the top decile since the portfolio’s inception.
• Growth factors drifted back into positive territory which was primarily driven by the short book. Short allocations to Utilities and Consumer Staples stocks accounted for more than two thirds of the exposure to Barra’s Growth factor. This indicates that investors were getting out of low growth stocks.
• The anti-quality posture of the portfolio was attributable to stocks in Software & Services, Financial Services, and Insurance. The market put a discount on profitability and earnings quality in favor of growth-oriented and beta-oriented stocks.
• Given the indications of likely rate cuts in 2024, it’s no surprise to see investors favoring stocks that are less sensitive or even inversely correlated with interest rates. The exposure to Wolfe’s Interest Rate Beta factor fell to -0.43 this week. Its last positive exposure came back in mid-October.
• Popular short stocks continue to thrive as the Short Interest factor exposure landed in its 90th percentile since inception. This has likely created some difficulty for long/short managers with crowded positions in their short books.

International Extreme Movers Portfolio Exposures

• The Materials sector showed the sharpest week-over-week reversal, from a 12% short allocation to a 17% long allocation which landed in the 98th percentile on a trailing-twelve-month basis. 12% of that allocation came from Metals & Mining stocks in South Africa, Australia, and South Korea.
• Insurance stocks drove the 18% short allocation to the Financials sector which reached just the 2nd percentile over the trailing twelve months. The majority of the Financials allocation was concentrated in China, particularly Japan, China, and India.
• The 12% long allocation to Industrials was led my Marine Transportation, Machinery, and Industrial Conglomerates. The allocation landed in the 95th percentile since inception.

• The International portfolio mirrored the US in terms of elevated beta factor exposures. Axioma’s Market Sensitivity factor even reached its 99th percentile on a trailing-twelve-month basis.
• Both growth and value factors reverted to positive territory this week thanks to the long allocation to Industrials and Materials. Dividend Yield and Earnings Yield factors in Axioma’s Worldwide model showed the most pronounced week-over-week changes.
• Quality factors were mixed as investors favored profitability over investment quality. This difference was most notable in the long allocation to Industrials.
• Like the US portfolio, the International portfolio was also significantly underexposed to interest rates. The -0.43 exposure landed in the 5th 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 Markets continued its strong run relative to Emerging Markets as it held a long allocation for the sixth week in a row. The 23% allocation marked the 80th percentile over the last twelve months.
• DM Europe and the Middle East showed a strong recovery sparked by slowing inflation numbers. The 9% allocation to the UK was its second highest in the last twelve months.
• Chinese stocks continued to struggle, especially in the Financials sector as investor sentiment has remained bearish amid geopolitical turmoil and challenging financial conditions.

Regards,
Kevin