Third Consecutive Quarter of Decline Capped by Persistent Inflation

Over the past several months, we've introduced Extreme Movers, the latest tool in our arsenal to understand what is driving markets from week to week. We also debuted an international version of the Extreme Movers portfolio to help investors compare fluctuating alpha opportunities and factor-driven dynamics between the US and the world. The Extreme Movers portfolios allow us to apply hindsight to the prior week's momentum to understand the following key questions better:

1. Was the preceding week an alpha-driven or factor-driven week?
2. What are the factor characteristics of the stocks that drove the market?

The Extreme Movers portfolios are weekly-rebalanced, market-neutral portfolios that consist of the top decile of stocks from the Russell 1000 and the MSCI ACWI ex-US, respectively, based on performance on the long side and the bottom decile on the short side. You can find additional information on the construction of the Extreme Movers portfolio in the May 22 edition of Factor Spotlight.

‍US Market Summary and Extreme Movers Metrics

US Market: 09/23/22 - 09/29/2022

• This week, equity markets continued their downward trajectory as investors grapple with economic uncertainty. The S&P 500 was down -3.1%, while the Nasdaq and Dow followed at -3.0% and -2.8%, respectively.
• The European Union’s statistics agency reported that consumer prices were up 10% year-over-year in August, which marks the highest recorded inflation rate in the eurozone.
• The UK unveiled a plan to introduce its most significant tax cuts in 50 years, which led to a -4.6% decline in the Pound Sterling relative to the US Dollar through market close on Wednesday.

Extreme Movers Portfolio Performance

Please note that the portfolio's return will always be positive by constructing a portfolio that is long the top movers and short the bottom movers in an index. That said, there are several areas we want to observe around weekly performance:

1. Is the weekly performance below or above the recent median weekly performance? Above the recent median means that the Extreme Movers portfolios had much higher dispersion than a typical week, most likely driven by higher factor volatility.
2. Is the weekly alpha contribution below or above the recent median alpha contribution? Above the recent median demonstrates that the significant market moves were more alpha-driven than in a typical week. Below the median, the market moves were more factor-driven than in a typical week.

• The US Extreme Movers portfolio return continued on its downward trend this week, returning 14.8%. Its year-to-date median weekly return is 17.6%.
• Unlike the two weeks prior, this was a heavily alpha-driven week which signifies that factors played less of a role in driving market performance.
• Long positions in Specialty Retail and Biotech and a short position in Mortgage Real Estate Investments drove the industry factor performance.

• The International Extreme Movers portfolio’s performance saw a moderate spike this week with a 17.9% return.
• Overall factor contribution to performance was in line with last week, but style factors took a back seat to country and currency factors.
• Factor performance was concentrated heavily in short positions in South Korea, the South Korean Won, and the Pound Sterling.

Extreme Movers Portfolio Exposure

Looking at the Extreme Movers from an exposure lens helps us decompose the individual styles and sectors associated with the portfolio's factor-driven performance and better understand broader patterns such as risk-on / risk-off or sector rotation.

• Financials showed the most significant reversal from last week, with a 17% short allocation fairly broadly distributed throughout the sector.
• In the opposite direction, Health Care went from a significant short position to the most prominent long in the portfolio this week, which Biotech drove.
• Although the portfolio’s allocations were mixed within Consumer Discretionary, Specialty Retail accounted for a 12% long allocation.

• Despite the continued drawdowns in the market, the risk-off trade from last week cooled off as beta and residual volatility factors were much closer to neutral.
• The most significant thematic shift came from growth and value as the portfolio moved away from value-oriented stocks into growth. The exposure to growth factors was led by long positions in Health Care and Information Technology and short positions in Financials and Real Estate.
• From a macro perspective, the portfolio’s short allocation to Energy increased its underexposure to Interest Rate Beta and Oil Beta as oil prices continue to fall.

• The international portfolio showed similar trends to the US this week as Health Care and Financials reversed course, becoming significant long and short allocations, respectively.
• The most significant difference between the two portfolios was the 18% long allocation to Consumer Staples, made up almost entirely of Food Products and Beverages, as uneasiness around recession has driven investors to defensive stocks.

• The international portfolio also took on an underexposure to both Interest Rate Beta and Oil Beta this week due to similar positioning in Financials, Real Estate, and Energy.
• Value's course correction was more prominent vs. the US portfolio due to its long allocation to Consumer Staples and short allocation to Financials. However, it didn't result in a material move to growth-oriented stocks.
• The positive exposure to crowding factors came from a 24% short allocation to South Korean stocks, many of which inversely correlate to crowded global hedge fund positions.

Regards,
Kevin