Stocks Close Strong First Quarter as The Fed Remains Cautious on Rate Cuts

Market Summary

US Market: 3/22/2024 - 3/28/2024

• U.S. headline indices showed limited activity this week. The S&P 500 saw a 0.25% increase over the five trading days ending Thursday, followed by the Dow at 0.07% and the Nasdaq at -0.14%.
• Federal Reserve Governor Christopher Waller noted this week that there is “no rush to cut the policy rate”, citing continued strong economic data and the desire to see consecutive months of slowing inflation before entertaining rate cuts.
• Both the S&P and Dow closed Q1 at all-time highs and the S&P posted its best first quarter since 2019 despite cautionary comments from the Fed. Investors and analysts seem to be split as to whether a soft landing will provide beneficial stock conditions or the significant bull rally will end abruptly due to impending macroeconomic catalysts.

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 yielded a return of 11.0% this week, characterizing it as "Calm". This return was lower than the previous week's performance and ranked in the 6th percentile for the trailing twelve months (TTM) and 32nd percentile since inception (ITD).
• Factors contributed only 15.4% of the total volatility, classifying this week as “Alpha-Driven”. Style factors accounted for only 40% of factor contribution, with industry factors making up the remaining 60%

International Extreme Movers Volatility and Factor-Driven Speedometers

• This week, the International Extreme Movers Portfolio fell under the “Volatile” category, posting a return of 16.5%. This return places it in the 85th percentile TTM and 69th percentile since inception.
• Factors were responsible for 29% of the total return, categorizing this week as “Neutral”. Country factors accounted for two-thirds of the total factor contribution, followed by industry, currency, and style at 9%, 3%, and 1%, respectively.

US Extreme Movers Portfolio Exposures

• Industrials remained at the top of the US Extreme Movers Portfolio this week though its allocation dropped to 8%. Three fourths of the allocation was driven by Capital Goods.
• Materials saw an allocation of 6%, which placed it in the top quintile since inception. This was driven by Metals & Mining, though all industries contributed positive allocations.
• Software drove the 14% short allocation to the Information Technology sector. Tech, along with Communication Services and Consumer Staples, fell into the bottom quartile of allocations since-inception.

• Beta and Volatility factors were slightly positive this week and driven by the long book as investors favored riskier names.
• Growth and Quality skewed negative, with growth notably landing in the bottom quintile since inception, and bottom decile over the trailing twelve months. This was driven by the long book as investors leaned into low-growth, low-quality names and shorted low-value.
• Interest Rate Beta and Oil Beta exposures were muted relative to last week while HF Crowding pushed further negative, pointing to possible downward price pressure on popular hedge fund long positions.
• Short Interest saw a positive allocation reaching the top quintile since inception, caused by investors going long names with high-short interest.

International Extreme Movers Portfolio Exposures

• The top and bottom allocations in the International Extreme Movers Portfolio were similar to the US portfolio this week. Industrials reached its top decile since inception with a 10% long allocation which was driven by an 8% allocation to Capital Goods.
• Info Tech’s 10% short allocation reached the bottom decile since inception, driven by a combination of Software at -3%, and and Semiconductors at -4%.
• Real Estate bounced back from last week’s short allocation to a long 5% allocation that was in the 97th percentile on a TTM basis. All industries were positive, and half of the allocation was driven by Real Estate Management & Development.
• Unlike the US, Health Care saw a short allocation that placed in the 28th percentile since inception. Biotech stocks contributed the most significant portion of the 3% short allocation.

• Volatility factors fell into the bottom decile since inception as international investors shorted names with higher levels of overall volatility. Beta factors were mixed, with Barra and Axioma both showing positive exposure in the short book and negative exposure in the long book. This suggests that investors both bought and sold anti-beta stocks.
• Investment Quality remained in favor, though other quality and value factors were mixed. Similar to the US portfolio, Growth was significantly negative, landing in the bottom quartile since inception. The growth positioning was driven by investors shorting high-growth names.
• Macro factors were muted, but diverged from the US portfolio, with the International portfolio aligning with stocks that tend to have a negative relationship with oil prices, and a positive relationship with interest rates.
• Crowding and Short Interest were both positive as investors avoided less-popular hedge fund longs and less-popular hedge fund 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.

• Developed Markets stayed ahead this week as the 30% long allocation landed in the top decile on a trailing-twelve-month (TTM) basis. The 30% short allocation to Emerging Markets landed in the bottom decile on both a TTM and since inception basis.
• The Europe & Middle East region led the swing, though Japan notably had the highest country allocation at 9%. Germany, the UK, and the Netherlands all saw allocations that placed in the top quintile TTM and since inception.
• Emerging Markets Asia’s short allocation doubled from last week, dominated by a -59% allocation to China that was the lowest position in the history of the portfolio. Tech, Consumer Discretionary, and Financials stocks accounted for the majority of that allocation.

Regards,
Reshma