Strong Economic Sentiment Propels Markets to Historic Highs

Market Summary

US Market: 2/2/2024 - 2/8/2024

• All US headline indices rose this week to varying degrees. The Nasdaq saw a 1-week performance of 2.5%, followed by the S&P at 1.9%, and by the Dow which came in at 0.5%.
• US Equity Markets closed at historical highs this week. A study published by The Conference Board shows that 50%+ of CEOs have positive feelings about the economy for the first time in more than two years. The sentiment originated from a mix of two factors primarily: slowing inflation and an expectation that the FED will lower rates in 2024.
• Discretionary spending among newer generations in the US has continued to rise, pushing credit card debt to historic highs, exceeding $1 Trillion. While the immediate impact on the US economy remains uncertain, some analysts warn of the potential formation of a significant credit bubble.

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 experienced a return of 19.3% over the week, placing it in the top quintile for inception-to-date (ITD)performance and classifying the period as “Very Volatile”.
• Factor contribution rose to 27.9%, which at the 63% ITD classifies the week as “Factor-Driven”. Style factors accounted for more than 70% of the total factor contribution.

International Extreme Movers Volatility and Factor-Driven Speedometers

• Ex-US volatility closely matched last week's, showing a minimal change with a weekly delta of -0.3%. The present volatility rate of 18.6% still falls into the “Very Volatile” category, ranking it within the top decile for trailing twelve months (TTM) and top quintile for ITD.
• Contrary to volatility last week, this week’s volatility was more driven by Alpha, with only 20.8% of the weekly volatility coming from factors, thus receiving a classification of “Alpha-Driven”. Country factors alone accounted for close to 60% of the factor volatility.
  

US Extreme Movers Portfolio Exposures

• Industrials rose to one of the highest levels ever seen, as it’s 17% allocation landed in the 96th percentile ITD. Most industries within the sector contributed to the long allocation, mostly led by Ground Transportation at 6%, followed by Electrical Equipment and Building products, each at 4%.
• Financials dropped to the bottom decile on both a TTM and an ITD basis, with Banks accounting for more than 80% of the total -21% position.
• Communication Services experienced one of its largest short allocations since data collection began in 2007, with a -11% weight predominantly led by Media, placing it in the 4th percentile ITD.

• Beta and Volatility factors landed close to their historical median, with most indicators positioning within the middle quintile ITD. The positive contribution from long positions was offset by negative contributions from other long positions, indicating that high-beta, high-volatility names were both sought after and avoided.
• The portfolio's orientation shifted towards Growth, with Growth factors reaching the top decile ITD, and away from Value, with most Value factors in the bottom decile ITD. This suggests a clear investor preference for growth-oriented and against value-oriented stocks, as contributions from both sides of the book reinforced these trends.
• Interest Rate Beta fell to the bottom quintile on a TTM basis, with influences from both long and short positions. This reflects an increase in demand for stocks negatively correlated with rising interest rates, and a decrease in demand for those positively correlated, indicating strategic positioning against interest rate hikes.

International Extreme Movers Portfolio Exposures

• Consumer Discretionary saw its largest allocation on a TTM basis and one of the largest on an ITD basis, with percentiles of 100% and 93%, respectively. Automobiles accounted for two thirds of this positive allocation.
• Utilities sector's allocation dropped to 9%, marking one of its lowest levels historically, positioned in the 5th percentile. The shortfall was primarily driven by Electric Utilities, contributing significantly to the sector's short positioning.
• Other notable sector exposures include Financials and materials, as both landed in the bottom quintile TTM. Banks was the main contributors to the Financials' positioning, while Metals & Mining led the decline in Materials.

• Volatility factors landed close to their historical maximum, with exposure contributions coming from the long book exclusively. Concurrently, the portfolio saw negative exposure to Beta factors. This implies that investors favored highly volatile, low-beta names for their long books.
• Dividend Yield experienced significant negative exposure contributions from both long and short positions, reflecting a shift in demand towards stocks with low or no dividend yield, and away from those with high dividend yield.
• Oil Beta landed close to its historical median, while Interest Rate Beta saw a slight underexposure coming from the short book exclusively. This indicates that investors moved away from names with a positive relationship to rising rates.

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.

• This week’s disparity between Developed Markets and Emerging Markets was the largest on record, as DM landed in the lowest levels and EM in the highest levels, since we started collecting data in 2007.
• In Developed Markets, the most significant negative impact on allocations came from Europe & the Middle East, at -37%. Within this region, most countries appeared the short book. Pacific followed, led almost exclusively by a -25% allocation to Japan.
• EM saw all of its positive allocation coming from Asia, which at 70%, landed in the 100th percentile ITD. China contributed the most at 42%, followed by Korea at 18% and India at 7%.

Regards,
David