US Investors Get ‘Defensive’ Over Inflation Reports

Note: Extreme Movers definitions can now be found in Factor University.

Market Summary

US Market: 2/17/2023 - 2/23/2023

• US stocks struggled this week on economic news. The Nasdaq took the hardest fall, returning -2.2% from Friday through Thursday. The S&P and Dow followed at -1.9% and -1.6%, respectively.
• The minutes from the most recent Fed meeting showed some economic optimism from officials, which led to the 25 basis point hike. However, there was a small contingent pushing for 50 basis points who feel that the reduction in hikes is premature.
• The more significant market reaction came on Friday after the personal consumption expenditures index, a key benchmark for Fed policy, rose 4.7% year-over-year and 0.6% in January. The Nasdaq closed the day down 1.7%.

Extreme Movers Portfolio Performance

US Extreme Movers Volatility and Factor-Driven Speedometers

• The US Extreme Movers portfolio returned 15.1%, which lands in "Volatile" territory for the third consecutive week.
• Investors who took advantage of two straight weeks of "Very Alpha-Driven" markets likely had more difficulty finding idiosyncratic return as this week jumped to the opposite end of the spectrum into "Very Factor-Driven" territory.
• Elevated levels of both volatility and factor influence were particularly prevalent in 2022. In our January 8th edition of Factor Spotlight, we highlighted that 59% of weeks in 2022 matched the behavior we saw in the US market this week.

International Extreme Movers Volatility and Factor-Driven Speedometers

• This week, the International Extreme Movers portfolio sat on the other half of both spectrums. Volatility was lower than average, and stock prices showed limited factor influence, marking both "Calm" and "Very Alpha-Driven."
• It is unusual but not unlikely to see Regime differences between the US and International portfolios. Though as we will see below, the US and International portfolios did showcase similar levels of sector positioning.

US Extreme Movers Portfolio Exposures

• The US Extreme Movers Portfolio reversed course into defensive sectors and away from cyclical sectors. The most significant concentrations were long Consumer Staples and short Information Technology.
• Consumer Staples showed the highest long concentration among all sectors, reaching its largest allocation since the portfolio’s inception in January 2007. Food Products Stocks were the primary contributors, accounting for more than 60% of the total sector allocation.
• Information Technology took a significant hit, driven chiefly by the Software and Semiconductors industries, resulting in one of the most prominent short allocations since inception at the 5th percentile.

• This week's portfolio showed a severe “risk-off” posture with some of the most significant underexposures to Volatility and Market Sensitivity since 2007. All sectors contributed to the negative allocations, but Information Technology and Consumer Staples led the way.
• Hedge funds benefited from their short allocations, with this week's exposure to Short Interest being one of the most underweight since 2007, only rivaled by the exposure of the week of February 2nd, 2009. Consumer Discretionary contributed the most to this underweight allocation.
• Value and Quality factors rallied while Growth stumbled. This behavior was a reversal from last week, given hotter-than-expected inflation numbers.

International Extreme Movers Portfolio Exposures

• The International Extreme Movers Portfolio sector allocation was mainly aligned with the US, though more sectors had allocations closer to neutral. The most significant outlier was Industrials at its 100th percentile ITD, driven chiefly by Taiwanese and South Korean stocks. India and Japan contributed to the short side of the Sector's allocation.
• Conversely, Information Technology saw one of its most significant short allocations ever, driven by Semiconductors and IT Services. Chinese securities contributed the most to this allocation, while Taiwanese securities contributed to the book's long side.

• The International Extreme Movers Portfolio exhibited similar behavior to its US counterpart, emphasizing the extreme short allocation to Market Sensitivity and Volatility.
• There remains a clear preference for Value over Growth, with nearly all Value factor exposures landing in the top decile YTD. This trend has contributed to positive returns from both the long and short sides of the book.
• The long book impacted hedge funds less than the previous week. Additionally, popular short crowded names resulted in favorable performance, while unpopular short crowded names saw positive performance across the board.

Regards,
David