Tech-Driven Bull Market Awakes Following A Halt In Rate Hikes

Market Summary

US Market: 6/9/2023 - 6/15/2023

• This week, all major market indices experienced a rally, with the Nasdaq leading the way thanks to a remarkable 4.84% gain by the hand of the Information Technology sector. The S&P followed closely behind, achieving a 3.07% increase, while the Dow secured third place with a notable return of 1.70%.
• Fed Chair, Jerome Powell, announced a halt to the rate hikes that have been occurring since last year's sharp rise in inflation. However, analysts predict an increased likelihood of a 25-bps increase during the upcoming FOMC meeting.
• The US stock market entered a bull period as both the S&P and the Nasdaq reached their 52-week highs.

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 achieved a return of 17.1%, positioning it in the 78th percentile of all weekly returns since 2007 and classifying it as "Volatile".
• The impact of factors on performance decreased from half of the contribution in the previous week to only a quarter. The factor contribution of 25.7% falls at the 50th percentile, indicating a "Neutral" classification.
• Short positions in Banks resulted in the industry factor accounting for 10% of the overall factor contribution to performance, while Industry factors collectively represented 60% of the total factor contribution. Style factors, particularly Market Sensitivity and Value, accounted for 37% of the total factor performance.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers portfolio achieved a return of 14.5%, placing it in the 46th percentile among weekly returns and categorizing this week as "Neutral".
• Similar to its US counterpart, factors in international markets accounted for 25.1% of the portfolio's return, ranking in the 40th percentile since 2007. This represents the first "Neutral" week in terms of factor contribution since the first week of April.

US Extreme Movers Portfolio Exposures

• The sector composition of the US portfolio pointed to yet another reversal in flows this week. Information Technology led the portfolio with a 38% net long allocation, placing it in the 98th percentile since inception, just one week after a 45% net short allocation. Software and Semiconductors were the key industry drivers at a 17% and 11% allocation respectively.
• Financials accounted for a 24% net short allocation after a 21% net long position last week. This landed in the bottom decile for the trailing twelve months and since inception. Banks were the key driver accounting for 20%.
• The long allocation to Communication Services and short allocations to Materials and Energy were among the other week-over-week swings, all landing in their top and bottom quartiles over the trailing twelve months. Energy’s swing was entirely due to Oil.

• Beta and Volatility exposures remained elevated in the US this week, though slightly dampened compared to the week prior. The “risk on” indication from beta and volatility factors has been persistent since the beginning of May.
• The significant repositioning away from Financials and toward Tech caused Value to be strongly out of favor, with Dividend Yield and Earnings Yield factors landing well into their bottom deciles since inception.
• Sector rotations from the week also resulted in another macro re-alignment as Interest Rate Beta and Oil Beta flipped back to strong negative exposures.
• The US portfolio was long popular hedge fund shorts, with allocations in the top decile since inception. The portfolio was also long popular hedge fund longs this week.

International Extreme Movers Portfolio Exposures

• The International sector story mimicked that of the US this week, although continuing to be more moderate in magnitude. Information Technology held the highest long allocation, while Health Care and Financials came neck-to-neck as the largest short allocations.
• Semiconductors comprised half of the long allocation to Tech, while Banks led the short allocation to Financials. Biotech and Pharma in Hong Kong, China, and Switzerland drove the short allocation to Health Care.
• Real Estate also took a hit this week, with a -7% allocation that landed in the bottom decile since inception. Allocations to Australia, the UK, and Japan were the key drivers.

• The International portfolio continued to be positive Beta, although Volatility factors were slightly negative. This pointed to a neutral risk appetite in the international markets this week.
• Similar to the US portfolio, Growth was in favor over Value due, in large part, to the portfolio’s short allocation to Financials and long allocation to Tech.
• Despite the shift to Growth, Oil and Interest Rate-sensitive stocks stayed in favor over stocks that tend to have inverse relationships with Oil and Rates.
• The International portfolio was long popular hedge fund shorts and short popular hedge fund longs, which likely created challenges for hedge fund managers on both sides of their books.

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 International Extreme Movers portfolio favored Developed Markets this week as the 11% long allocation to DM landed in the 63rd percentile since inception. Japan accounted for a large portion of the allocation.
• Asia was out of favor in Emerging Markets, led by a -12% allocation to China. Health Care and Financials stocks led the short allocation to China.

Regards,
Reshma

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