Stocks Tumble as Bond Yields Climb to New Heights

Market Summary

US Market: 10/13/2023 - 10/19/2023

• US Headline Indices were heavily in the red for the week ending 10/19. The Dow Jones finished highest at -0.7%, while the S&P and the Nasdaq struggled with weekly returns of -1.8% and -3.3%, respectively.
• After a widely anticipated speech from Federal Reserve Chair Jerome Powell on Thursday, markets expect no rate hike in November and are pricing a low chance of a hike in December, although uncertainty remains around when the central bank might begin to consider cuts.
• US Treasury yields have continued to surge this week, with 10-year borrowing rates reaching within a basis point of 5% at Thursday’s close, and briefly moving above 5% in overnight trading. The 10-year yield has climbed 1.2% since July of this year and has now reached highs that have not been seen since 2007.

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 16.0%, placing it within the "Volatile" category for the week. Its volatility was at the 51st percentile TTM and the 73rd percentile ITD.
• Factors accounted for 36.2% of the overall volatility, designating this week as "Very Factor-Driven" and ranking it at the 84th percentile TTM. Industry and style factors made up almost equal parts of the factor volatility.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers Portfolio posted a 15.3% return that placed in the 59th percentile TTM and the 56th percentile ITD. This classified the week as “Neutral”.
• Factor contribution came down from highs a few weeks ago, accounting for 28.4% of the week’s overall volatility. This placed near the 50th percentile in both TTM and ITD. Industry and country factors each accounted for close to 40% of the factor volatility.

US Extreme Movers Portfolio Exposures

• Energy remains a dominant sector, with its current allocation hitting the 99th percentile on a trailing twelve-month (TTM) basis. Within this sector, Oil, Gas, and Consumable Fuels represent a significant portion, making up 20% of the total 24% sector allocation.
• Consumer Staples have risen to above the top decile on a TTM basis, led primarily by the Distribution & Retail and the Household Products industries.
• The Financials sector maintained an 11% allocation, with the Insurance industry leading at 10%, followed by Banks at 3%. The Consumer Finance, Mortgage REITs, and Financial Services industries experienced negative allocations.
• Almost all industries in the Industrial sector, Aerospace & Defense being the exception, contributed to the sector’s negative exposure. The sector’s 32% short allocation stands as one of the highest on record, ranking at the lowest percentile since inception (ITD)

• This week, the US portfolio demonstrated a marked preference for Volatility over Beta, a shift driven by investors moving away from high-beta stocks and in favor of those exhibiting anti-beta characteristics.
• The long exposure to Interest Rate Beta came from both sides of the book, implying that investors favored assets with positively correlated with rising rates while avoiding those negatively correlated.
• Oil Beta exposure reached the highest levels seen in the past trailing-twelve-months, with investors heavily favoring stocks positively correlated with crude prices and shunning those with an inverse relationship to rising crude costs.
• Value saw strong positive exposures across all indicators, with Earnings Yield reaching the top decile and Dividend Yield the top quintile, both on a TTM basis.

International Extreme Movers Portfolio Exposures

• Mirroring its US counterpart, the International Extreme Movers portfolio saw strong positive allocations to Energy when compared to the historical mean. This 15% long allocation, the highest in the trailing twelve months, was primarily propelled by Oil, Gas, & Consumable Fuels.
• Financials was also in the spotlight this week, sharing the top at a 15% long allocation driven by Banks and Insurance, at 11% and 8%, respectively.
• The strong negative allocation to Industrials came from all its industries, resulting in an allocation ranking in the 2nd percentile both on a TTM and on a ITD basis.

• The portfolio saw short exposures to both Volatility and Beta. The negative exposure to Volatility came exclusively from the short book, while the negative exposure to Beta came from both sides of the book.
• Exposures to Growth remained relatively neutral, while exposures to Value shifted towards positive territory. Dividend Yield and Earnings Yield in particular, reached close to their highest historical levels, ranging between the 97th and the 100th percentile.
• The exposure to Oil Beta reached the top quintile TTM, as investors favored stocks with positive correlations to rising crude 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.

• For the third consecutive week, the allocation to Emerging Markets (EM) has surpassed that of Developed Markets (DM). The 13% long allocation to EM ranks in the 65th percentile TTM, while the 13% short allocation to DM ranks in the 27th percentile TTM.
• Asia was the largest contributor to the long positions in Emerging Markets, with India alone accounting for 13% of this allocation, placing the country in the 97th percentile on an ITD basis. Conversely, the Americas skewed the balance with an 8% short position to Brazil.
• Within Developed Markets, Europe & the Middle East reversed course dramatically, shifting from being last week's largest positive allocation to being this week's largest negative allocation, characterized by short positions across numerous countries in the region.

Regards,
Reshma