US Stocks Bounce Back on Soft-Landing Optimism

Market Summary

US Market: 8/9/2024 - 8/15/2024

• The US headline indices saw a significant uptick this week, on course for their best week so far this year, following last week’s major downturn. The Nasdaq led the pack with a 5.3% gain, followed by the S&P 500 at 4.2%, and by the Dow which closed at 2.7% over the five trading days ending Thursday.
• July CPI data released Wednesday showed US core inflation easing for a fourth month on an annual basis, with the measure climbing just 0.2% on a monthly basis and 3.2% on an annual basis. The data spurred optimism that the US will avoid a recession, and reinforced investors’ bets that the Fed will cut interest rates in September, though traders remain split on whether to expect a quarter-point or half-point cut.
• Iron ore, a key component of steel-making, hit its lowest level since 2022 this week, making it one of the year’s worst performing commodities. The slump was spurred by growing concerns that China’s steel-industry crisis will affect demand as steel makers slash outputs, while major miners in Australia and Brazil have growing supplies.

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 saw a return of 19.0% this week landing again in the “Very Volatile” category. This places this week in the 82nd percentile on a training-twelve month basis and the 85th percentile since inception.
• Factor returns remained high this week driving 34.4% of the total performance, and earning the “Factor-Driven” classification, with 75% of the volatility driven by Style factors. This places the week in the 88th percentile for TTM and 79th percentile since inception.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme movers portfolio also saw elevated volatility but to a lesser extent, reaching a return of 16.7%. This classifies as “Volatile” and places this week in the 78th percentile on a training-twelve month basis and 70th percentile since inception.
• Returns were "Factor-Driven" for the International portfolio as well, with factors accounting for 32.7% of the week’s performance. This marks the 76th percentile TTM and the 72nd percentile since inception, and over half of the volatility was driven by Country factors.

US Extreme Movers Portfolio Exposures

• Information Technology surged this week as it went from being the largest underweight sector to the largest overweight with a 32% long allocation. This places the sector in the 97th percentile since inception. Withing the sector, the Semiconductors & Semiconductor Equipment industry contributed 17% alone.
• Financials was the second most favored sector this week with a 10% long allocation, placing it in the 80th percentile for both TTM and ITD. Capital Markets and Financial Services were the main contributors at 7% and 5% respectively, while Consumer Finance and Insurance had short allocations of -1% and -2%, respectively.
• Consumer Staples saw a significant decline this week, going from a 17% long allocation to a 10% short allocation. Consumer Staples Distribution & Retail stocks were the main drivers accounting for half of the total.
• Another sector that fell out of favor this week was Communication Services, with a 10% short allocation. This places the sector in the 10th percentile since inception. All industries within the sector contributed to this short position, but Media was the primary driver.

• Most Beta and Volatility factors rose this week, as investors were willing to take more risk. Barra’s Beta factor stood out as the most significant, reaching an exposure of 1.41. This placed it in the top percentile on a trailing-twelve month basis. The long book was the primary driver, accounting for more than two-thirds of the total allocation for most factors. This indicates that investors favored high beta names in their long books while also shorting low beta names but to a lesser extent.
• Growth factors were also favored this week, landing near the top decile for both trailing twelve months and inception-to-date. The long allocation to the Information Technology sector was the primary driver of this exposure, while the short allocation to Consumer Staples also made a significant contribution.
• Value Factors fell this week, with most factors landing in the bottom quintile for both TTM and ITD. While all sectors contributed to the low exposure to growth, the short positions in the Communication Services and Consumer Discretionary sectors were the main contributors. This suggests that investors were betting against cheap stocks this week in favor of growth-oriented names.
• For Crowding factors, HF Crowding was the most significant as it reached the top percentile for trailing twelve months (TTM). This suggests that it was a favorable week for hedge fund long books, as investors showed a preference for popular hedge fund bets.

International Extreme Movers Portfolio Exposures

• Financials rose as the most represented sector with an 11% long allocation. Insurance and Banks stocks were the main drivers of this allocation. Which placed the sector in the 81st percentile for a TTM basis.
• Information Technology also saw a significant shift going from an 11% short allocation to a 10% long allocation, landing in the top quintile for an inception to date basis. Technology Hardware, Storage & Peripherals was the most represented industry as it accounted for 4.5% alone.
• Materials remained as in the short book with a 10% short allocation. this placed the sector in the 17th percentile on a trailing-twelve month basis and 19th percentile since inception. Chemicals was the main driver contributing by -5.6% alone.
• Similar to the US Portfolio, Consumer Staples fell low this week with a -8% allocation. Food Products and Consumer Staples Distribution & Retail industries were the main contributor to this allocation.

• Beta and Volatility factors were mixed this week, with Residual Volatility and Volatility ranking notably low, while Beta and Market Sensitivity were high. For Barra’s Beta factor, the positive exposure was driven by the short book, indicating that investors chose to bet against names with low beta exposure. Conversely, the long side contributed negatively, showing a preference for low-beta names as well.
• Crowding factors were notably low this week, particularly Short Interest, which landed in the 5th percentile for trailing twelve months (TTM) and the 11th percentile since inception. This low exposure was primarily driven by short positions in the Materials sector and long positions within the Health Care sector.
• The remaining factor categories were fairly muted, with most landing close to their mean values. Quality factors were slightly favored, while Growth factors were slightly out of favor.

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, Developed Markets were favored in the International Extreme Movers Portfolio, receiving a 26% long allocation, which places it in the 84th percentile on a trailing twelve-month basis. In contrast, Emerging Markets saw a short allocation of -26%, a particularly low figure for the region, landing in the 9th percentile for the same period.
• The DM allocation was primarily driven by the Pacific region, with an 11% long allocation. Japan made a significant rebound, jumping from a -33% last week to 11% this week, making it the largest contributor in the region. Canada had the second-highest allocation at 10%, marking its highest level for a trailing twelve months basis.
• Within EM, Asia had the largest representation, with a short allocation of -40%, placing the region in the 3rd percentile since inception. China was the main contributor, accounting for -35% of this allocation. In contrast, the Americas saw a strong long allocation of 16%, positioning the region in the 93rd percentile since inception. Brazil was the primary driver of this positive exposure, contributing 13% alone.

Regards,
Jose