Stock Markets Slide as Global Yields Rise

Market Summary

US Market: 8/11/2023 - 8/17/2023

• US headline indices faced another down week, following a brief initial increase that ended Monday. The Nasdaq was hit the hardest, earning a return of -4%, followed by the S&P, which saw a downturn of -2.7%. The Dow was not far behind, finishing at -2%.
• Global bond yields hit a 15-year high after Fed meeting minutes published Wednesday indicated concern for significant inflation risk. The broader concern that interest rates may remain higher for longer than expected has led to a general sell-off in risk assets this week.
• China’s central bank cut key policy rates for the second time in three months this week in an effort to boost the sluggish post-COVID economic recovery. The cut came alongside the release of July economic data that pointed to rising deflation risks, subdued credit data, and slowing growth in retail sales and industrial output.

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 was “Volatile” this week, achieving a return of 14.8%. This places it within the 66th percentile since 2007.
• Factor contribution rose to 18.2%, placing it in the 30th percentile since 2007 and changing the classification to "Alpha-Driven."
• A “Volatile” return coinciding with an “Alpha-Driven” market provides fundamental investors with a favorable stock-picking market, since stock prices are moving due to idiosyncratic alpha rather than systematic forces.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International portfolio remained “Calm“, achieving a return of 13.8%. This places it in the 37th percentile since inception.
• A shift from the week prior, factors accounted for 26.3% of the total return, placing in the 46th percentile since inception. This categorizes the week as “Neutral”, meaning stock prices were driven by both market forces and idiosyncratic alpha.

US Extreme Movers Portfolio Exposures

• Information Technology led this week's long allocation in the book with a significant 17% position, placing it in the top quartile both in terms of trailing twelve months (TTM) and year-to-date (ITD) performance. Notably, 14.5% of this allocation originated from the Software Industry alone.
• Within the Financials sector, Insurance accounted for a 7% allocation. However, when combined with a -12% allocation in Banks and a -5.5% allocation in Consumer Finance, the sector ended up with an aggregate short allocation of -15%.
• Materials found itself in the bottom decile ITD, largely due to the substantial short allocation within the Chemicals industry.

• The US portfolio behaved similarly to last week’s portfolio, as volatility and beta factors landed at the bottom quintile both on a TTM and on an ITD basis. These negative exposures stemmed from the short positions, indicating that investors positioned themselves against high beta and highly volatile stocks.
• Value and Growth flipped directions. The shift toward growth was observed on both sides of the portfolio, whereas the negative value allocation primarily originated from the short positions, notably within the financial sector.
• The HF Crowding exposure increased to the top decile, driven by a surge in investor interest in popular long positions within the Information Technology and Health Care sectors.
• The negative exposure to Interest Rate Beta came from both sides of the book, implying that investors favored stocks that have a negative relationship to rising rates, and distanced themselves from stocks with a positive relationship to rates.

International Extreme Movers Portfolio Exposures

• Consumer Staples took the lead in this week's international portfolio, with every industry contributing to the 10% long allocation, positioning it within the top decile in terms of both TTM and YTD allocation.
• Energy followed with a 6% long allocation, all of it coming from the Oil, Gas & Consumable fuels industry.
• The negative exposure to Materials was solely attributed to the Metals & Mining and Chemicals industries, resulting in a placement at the 6th percentile TTM and the 19th percentile ITD.

• Volatility factors landed in the bottom decile ITD, while Beta factors landed in the bottom quartile ITD. Both came from the short book, implying that investors bet against high beta and highly volatile names.
• Growth factors took a dive, landing in the bottom decile ITD with contributions from both sides of the book. Meanwhile, Value factors remained relatively neutral, as the positive exposure from the long positions counterbalanced the negative exposure from the short positions.
• Quality factor exposures remained high, while macro factor exposures were mixed, as the portfolio is positioned favorably towards rising rates, and against rising oil prices.

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 allocation to Developed Markets strengthened, reaching 18%, while Emerging Markets saw an increased presence in the short book. This Emerging Markets allocation ranks in the lowest quintile both in terms of TTM and ITD allocation.
• China stood out prominently with a whopping -41% weight in the portfolio. Other noteworthy allocations within EM include Saudi Arabia and Kuwait, both ranking at the 99th percentile ITD, as well as Mexico, which ranks at the 93rd percentile ITD.
• Within DM, a few notable country exposures include Germany at the 98th percentile ITD, Denmark at the 90th percentile ITD, and Singapore at the bottom quintile ITD.

Regards,
David