US Investors Choose Beta With Fed Rate Cut

Market Summary

US Market: 9/13/2024 - 9/19/2024

• US headline indices posted strong gains again this week. The Nasdaq again led the way at 2.53%, followed by the Dow at 2.26%, and the S&P 500 with 2.11%.
• On Wednesday, the much-anticipated Fed announcement resulted in a benchmark rate cut of 50 basis points. Consensus was fairly split leading in between 25 and 50. The US stock market ended relatively flat in Wednesday’s trading but jumped considerably in Thursday’s session.
• The final major economic release prior to the Fed meeting was Tuesday’s retail sales report which showed a 0.1% increase relative to a consensus estimate of a 0.2% decrease. The release highlighted the fact that US consumer spending is healthy despite labor market slowdowns.

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

• This week, the US Extreme Movers portfolio delivered a 15.6% return which is categorized as “Volatile”. This week ranks in the 62nd percentile for the trailing twelve months and 71st percentile since inception.
• Factors accounted for 32.3% of the total return landing in the “Factor-Driven” category. This factor contribution fell in the 85th percentile over the trailing twelve months and the 75th percentile since inception.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers Portfolio pointed to less overall volatility with a 13.5% return. This performance places it in the 32nd percentile since inception and categorizes this week as “Calm”.
• Factor contribution, however, was elevated as factors accounted for 32.4% of the portfolio’s return. That contribution landed in the 77th percentile on a TTM basis and the 71st percentile since inception, earning a “Factor-Driven” distinction.

US Extreme Movers Portfolio Exposures

• Software and Semiconductors & Semiconductor Equipment led a massive reversal in Information Technology this week, landing in just the 5th percentile since the inception of the US Extreme Movers portfolio. The two industries made up -10% and -11% of the 26% short allocation, which moved tech from the largest long allocation to the largest short allocation.
• Financials also saw another larger reversal in the opposite direction, going from an 18% short allocation back to an 11% long. Capital markets made up most of that allocation at 7%, while Financial Services and Consumer Finance accounted for another 3% each. The 11% long landed in the 83rd percentile on a trailing-twelve-month basis.
• Consumer Discretionary was the top allocation at 17%, reaching the 96th percentile on a trailing-twelve-month basis. Specialty Retail was the biggest driver of this with a 7% allocation, followed by Textiles, Apparel & Luxury Goods at 4%.

• The strength of Consumer Discretionary and Financials led to significant positive exposures to beta factors while long Industrials and short Health Care allocations resulted in slightly negative exposures to residual volatility factors. These exposures point to a general increase in the appetite for market risk among US investors.
• Investors favored value over growth stocks this week, particularly in Consumer Discretionary, Industrials, and Financials where they bought high earnings-yield names, and sold growth-oriented names in Health Care and Tech. The 0.82 exposure to Wolfe’s Earnings Yield factor was in the 88th percentile since inception.
• With the heavy short allocations to Health Care and Tech, with Materials and Energy back in positive territory, Oil Beta was back to positive this week. The 0.29 exposure landed in the 79th percentile over the trailing-twelve-months. Aversion to interest rates reduced, with Interest Rate Beta at -0.12, reaching the 41st percentile since-inception.
• Short Interest was up this week, reaching the 90th percentile on a trailing-twelve-month basis, as investors both bought and sold high interest names. HF Crowding was also higher than the week prior, as investors leaned into more popular longs.

International Extreme Movers Portfolio Exposures

• Industrials climbed to the top of the portfolio this week, reaching the highest allocation we’ve seen in the portfolio over the trailing-twelve-months. The 16% long was driven primarily by Capital Goods, with Industrial Conglomerates and Machinery leading the way at 4% and 3% respectively.
• Materials also saw a particularly high allocation at 15%, reaching the 94th percentile on a trailing-twelve-month basis. This was driven overwhelmingly by Metals & Mining, which was the single largest industry allocation in the portfolio at 18%.
• Consumer Staples saw a big reversal this week landing at the bottom of the portfolio with a 14% short allocation that was the lowest we’ve seen over the trailing-twelve-months. This was driven by Food Products and Beverages at -6% and -7% each.
• Similar to the US, Information Technology was one of the largest short allocations this week, reaching just the 6th percentile over the trailing-twelve-months, and 5th percentile since inception. Asian Semiconductors & Semiconductor Equipment stocks continued to make up the largest contribution.

• Risk appetite was similar to the US market, with investors leaning into higher Beta stocks, while still avoiding higher Volatility. Short allocations in Tech and Consumer Staples were the biggest contributors to the low-vol positioning, while Materials drove much of the higher beta positioning.
• The International portfolio bounced back from last week’s “anti-value” position, as Axioma and Barra’s Value factors reached the 95th and 99th percentile TTM. Materials and Financials were the main drivers of each factor.
• Oil Beta was positive this week, reaching the 84th percentile over the trailing-twelve-months as investors leaned into higher oil beta stocks in Materials and Energy. Interest Rate Beta was also slightly positive, reaching the 57th percentile TTM and was driven largely by the long allocation to Industrials.
• Crowding factors looked much better this week for hedge fund managers. Wolfe’s HF Crowding factor rose to its 73rd TTM percentile as its Short Interest factor fell to the 45th percentile. That means that popular hedge fund longs were rising and popular shorts were falling.

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, the International Portfolio continued to slightly favor Developed Markets with a 5% long allocation, positioning it in the 44th percentile for the trailing twelve months and the 53rd percentile since inception.
• Sweden and Germany both reached their top deciles TTM, each with a 5% allocation that droved the Europe & Middle East region. Despite Developed Markets being up overall, the Pacific region performed poorly, driven by Japan’s short 11% allocation that placed in the 15th percentile TTM.
• In Emerging Markets, there was a large disparity between Asia and the Americas. China contributed heavily to a 24% short allocation in Asia, but the Americas were up, driven by a 9% allocation in Mexico that was the highest we’ve ever seen.

Regards,
Jose