US Investors Sell Risk and Flock to Quality

Market Summary

US Market: 6/14/2024 - 6/19/2024

• US headline indices were up this week, despite a slight dip on Thursday. The Dow led with 1.28% over the five trading days ending June 20th. The S&P 500 followed at 0.69% while the NASDAQ ending at 0.31%.
• Nvidia briefly became the most valuable company in the world this week, as it surpassed both Microsoft and Apple with a market cap above $3.34 trillion on Tuesday.
• Housing starts fell 5.5% in May, reaching an annual pace of 1.28 million houses that fell short of the market’s expected 1.38 million. This marks the lowest level in four years, as builders grapple with concerns over financing construction as interest rates remain elevated.
• The Swiss National Bank engaged in it’s second rate cut of the year on Thursday, while the Bank of England and others remained steady. The 25 basis point cut leaves the rate at 1.25%, and points to easing price pressures in Switzerland.

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

• US volatility dropped again this week as the US Extreme Movers portfolio earned 14.1%, which categorizes the market as “Volatile”. This return falls in the 39th percentile on a trailing-twelve-month (TTM) basis and the 61st percentile since inception.
• The US saw much more factor influence than last week, with a 32.7% contribution that categorized as “Alpha-Driven”. Majority of the factor returns were driven by Style factors.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers portfolio also pointed to a “Volatile” week with a higher performance than last week. The 17.2% return level marks the 82nd percentile TTM and the 74th percentile since inception.
• Even more so than in the US, factors were the dominant force in stock return this week. Factors accounted for 36.5% of the total, earning the “Very Factor-Driven” classification. Country and Currency factors were the primary drivers.

US Extreme Movers Portfolio Exposures

• REITs drove a 10% long allocation to Real Estate in the US Extreme Movers portfolio this week. That positioning landed in the 91st percentile on a trailing-twelve-month basis.
• The Health Care sector fell to its 13th percentile since inception with a 13% short allocation. Health Care Equipment & Supplies and Life Sciences Tools & Services combined for 11% of the positioning while Health Care Providers & Services represented the only industry with a long allocation.
• Household Products accounted for half of the 8% long allocation to Consumer Staples. This week marked the largest long allocation to Consumer Staples since mid-April and reached the 93rd percentile on a trailing-twelve-month basis.

• Risk appetite remained very low in the US this week as investors sold beta and residual volatility factors to a strong degree. Exposures to Barra’s Residual Volatility factor and Axioma’s Volatility factor fell all the way to the 1st percentile and lowest level over the trailing twelve months.
• US investors heavily favored value and quality factors over growth. Exposure to Wolfe’s Profitability factor reached its highest level since inception and all quality factors fell in their top deciles. All value factors landed in their top quartiles since inception.
• Wolfe’s HF Crowding and Short Interest factors both showed strong negative exposures which indicates that both popular long and short stocks faced significant headwinds this week. HF Crowding’s -0.64 exposure marks the 2nd percentile on a trailing-twelve-month basis and the 7th percentile since inception.

International Extreme Movers Portfolio Exposures

• Information Technology remained the top sector in the International portfolio this week. Unlike last week, Electronic Equipment, Instruments, & Components was the key driver, accounting for over 10% of the 17% long allocation. Software was the lone negative industry in tech. Taiwanese stocks made up over 11% of the long allocation.
• All Health Care industries were negative this week which led to a 14% short allocation. That -14% is the lowest level over the past twelve months and falls in the 2nd percentile since inception. Life Sciences Tools & Services was the top contributor.
• Stocks in Hong Kong, South Africa, India, and Taiwan provided a 10% long allocation to Financials. More than half of that allocation was attributable to Banks.

• Beta and volatility factors showed a strong divergence in the International Extreme Movers portfolio this week, suggesting that investors were willing to take risk but opted for volatility less attributable to broader market beta.
• Like in the US, value factors were generally favored in international markets. Dividend Yield exposures were particularly high as both Barra and Axioma showed levels in the upper quintile both on a trailing-twelve-month and since-inception basis.
• Oil Beta exposure spiked this week after two weeks of strongly negative exposure. The short allocations to Industrials and Consumer Discretionary accounted for 0.18 of the 0.23 exposure which marked the 78th percentile of the trailing year.

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.

• Emerging Markets dominated the International portfolio. The 62% long allocation climbed to the 99th percentile since inception and 98th percentile on a trailing-twelve-month basis.
• Asia accounted for 46% of that 62% and was fairly evenly distributed across China, Taiwan, and India. The majority of the Asian stocks were concentrated in Information Technology but Industrials, Consumer Discretionary, and Financials had substantial contributions as well.
• The favor for EM and aversion to DM was most apparent in the EMEA region. The 15% long allocation to Emerging Markets EMEA landed in the 98th percentile over the trailing year while the 48% short allocation to DM Europe & Middle East was the most significant short of the trailing year.

Regards,
Reshma