US Rate Cut Sentiment Cooled by May Jobs Report

Market Summary

US Market: 5/31/2024 - 6/6/2024

• US headline indices rallied over the five trading days ending June 6th. The Nasdaq saw the strongest return at 2.61% while the S&P and the Dow followed closely behind at 2.24% and 2.03%, respectively.
• The Bureau of Labor Statistics reported a non-farms payrolls increase of 272,000 in May relative to the consensus estimate of 190,000. As a result, the rate cut trade reversed as Fed funds futures pointed to sustained levels of rates for the remainder of the summer and potentially beyond.
• The European Central Bank made its first interest rate cut in almost five years on Thursday as inflation readings have fallen close to the 2% target level. The 25 basis point cut pushed European headline indices higher in Thursday’s trading session.

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 jumped into “Very Volatile” territory this week with a return of 18.6%. That return level falls in the 84th percentile since inception.
• Similar to last week, factors contributed 21.2% of the total performance, placing it in the “Neutral" category. This return ranks in the 41st percentile since the portfolio’s inception.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers portfolio returned 15.9%, categorizing it as “Volatile”. This week's performance landed in the 64th percentile since the portfolio's inception.
• Factors contributed to 27.9% of the total which falls in the “Neutral” category. This return ranks in the 53rd percentile since inception.

US Extreme Movers Portfolio Exposures

• Specialty Retail drove another strong week for the Consumer Discretionary sector, which saw a 20% long allocation. This positioning marked the 98th percentile on a trailing-twelve-month basis. Consumer Discretionary was the largest long allocation last week which was also driven by Specialty Retail along with Textiles, Apparel & Luxury Goods.
• Real Estate also saw a particularly strong allocation at 12%, placing it in the 96th percentile over the last twelve months. All industries were positive, but Specialized REITs led the sector at 4%.
• Industrials remained at the bottom of the portfolio, along with Materials, with both sectors’ allocations ranking near the bottom decile since inception. Professional Services, Electrical Equipment, and Building Products accounted for the majority of the Industrials position, while Metals & Mining drove Materials.
• Information Technology was the worst sector this week, reaching just the 8th percentile since the inception of the US portfolio. Software contributed heavily to this allocation with a 17% short position.

• Beta and volatility factors picked up slightly, as investors showed stronger anti-beta sentiment alongside a slightly increased appetite for volatility. The long volatility exposures were driven heavily by long allocations to Consumer Discretionary and Health Care.
• Growth was strongly out of favor this week, as exposures reached their lowest point over the last twelve months. This was driven almost equally by the long and short sides of the book, as investors bought anti-growth names in Consumer Discretionary and Real Estate, while selling high-growth names in Tech, Financials, and Energy.
• The US portfolio also leaned away from macro factors, with Interest Rate Beta nearing the bottom quartile TTM, and Oil Beta nearing the bottom decile. The short allocations to Energy and Materials significantly contributed to the negative Oil Beta positioning.
• In contrast to last week, Wolfe’s HF Crowding showed a very strongly negative exposure while their Short Interest exposure was strongly positive. This suggests hedge fund managers may have felt headwinds on both sides of their books as popular bets worked against them.

International Extreme Movers Portfolio Exposures

• Health Care rose to the top of the book this week, driven by Pharmaceuticals and Biotech which together represented the majority of the 10% sector position. The Health Care bounce back was geographically diversified but Hong Kong and Switzerland were the most significant contributors.
• Metals & Mining represented the largest short industry allocation in the ex-US portfolio at -18%, accounting for more than half of Materials’ 25% short position. This allocation landed the sector in the bottom percentile over the last twelve months.
• Energy also saw a significant short allocation, with a -8% position that placed in the 4th percentile over the trailing-twelve-month period. This was driven overwhelmingly by Oil, Gas & Consumable Fuels, particularly in China, Canada and India.

• International investors continued to show more risk aversion than what was seen in the US, as residual volatility factors landed in the bottom quintiles this week. Axioma’s volatility factor reached its 11th percentile TTM due to short allocations in Materials and Energy.
• Barra’s Profitability factor hit the 84th percentile TTM with a 0.17 exposure, indicating that investors favored companies with stronger operating fundamentals. Much of this was driven by long positions in Health Care and Consumer Staples, along with short positions in Materials.
• Oil Beta exposure dropped this week, hitting a low point of -0.61 that placed in the bottom decile TTM and ITD. This was driven by the large short allocations to Energy and Materials this week, as investors positioned away from stocks that tend to benefit from elevated oil prices.

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.

• Developed Markets were strongly in favor over Emerging Markets this week, accounting for a 42% long allocation in the International portfolio. This allocation marked the 98th percentile over the trailing-twelve-months, while Emerging Markets’ -43% allocation marked the lowest position over the same period.
• The Europe & Middle East region was the largest regional contributor to the allocation, but Japan was the largest individual country contributor, accounting for 16% of the total DM allocation.
• Emerging Markets were strongly out of favor across all regions, with Asia leading the way at -18%. That said, South Africa was the largest negative contributor to the Emerging Markets allocation, accounting for a -13% position that fell in the bottom percentile TTM and just the 3rd percentile since inception.

Regards,
Reshma