Volatility Quiets as Equity Sentiment Rebounds

Market Summary

US Market: 8/25/2023 - 8/31/2023

• Nasdaq led US headline indices this week to close out a challenging August. The Nasdaq returned 4.2% over the five trading days ending August 31st, while the S&P and Dow followed at 3.0% and 1.8%, respectively.
• Friday’s jobs report revealed 187,000 jobs added in August in the US. Despite a month-over-month increase, August’s report still points to a labor market slowdown relative to what we experienced last year. Unemployment also ticked up from 3.5% to 3.8%. Slowing economic growth as indicated by the labor market has investors expecting a cool-down in Fed rate policy.
• The largest Chinese banks cut lending rates this week in an effort to slow economic difficulties that have been compounding. The Chinese central bank also announced it will lower the reserve requirement ratio on foreign exchange from 6% down to 4% to mitigate the decline of the Yuan.

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 pointed to the lowest levels of total market volatility since June with a return of 11.5%. That return fell in the 39th percentile of weeks since inception and landed in “Calm” territory.
• Alpha was back in a big way as factors only accounted for 10% of the portfolio’s total return. Factor influence was at just the 6th percentile since inception.

International Extreme Movers Volatility and Factor-Driven Speedometers

• Characteristically, international markets matched the US this week. The International Extreme Movers portfolio returned 13.6% which sits in the second quintile since inception and is categorized as “Calm”.
• 17.8% of the portfolio’s return was attributable to common, systematic factors which marks the 11th percentile since inception. Based on its own history of factor influence, this week can be categorized as “Very Alpha-Driven”.

US Extreme Movers Portfolio Exposures

• Sector allocations in the US portfolio landed much closer to the mean this week than the week prior. Financials led at 10%, placing it in the 79th percentile since inception. All industries contributed to the positive allocation, with Capital Markets at 4%, followed by Insurance at 3%.
• Industrials and Materials followed with 6% allocations each. The Materials allocation was notably in the top quintile, both TTM and ITD and was dominated by Chemicals at 5%.
• Consumer Staples led the short side of the portfolio with a -7% allocation that placed it just above the bottom decile TTM. This was driven by Consumer Staples Distribution & Retail at -5%.
• Information Technology fell to the short side of the portfolio after two weeks of dominating the book. The -1% allocation was driven by Semiconductors and Tech Hardware at -2% each but was balanced out by Software, which maintained a positive 4% allocation.

• Beta factor exposures pushed more positive this week, primarily influenced by the long book (largely financials). Volatility factor exposures remained varied between models, generally leaning towards a negative exposure driven by the short book.
• The portfolio continued to have a positive Growth tilt and a negative Value tilt, both driven primarily by the long book. This indicates that investors favored stocks demonstrating high earnings and sales growth and fled from stocks with higher earnings and dividend yields.
• HF Crowding and Short Interest exposures both flipped from last week’s positions. The negative crowding exposure was driven largely by the short book, while short interest was driven by the long book, implying that hedge fund managers shorted popular longs this week and bought popular shorts.

International Extreme Movers Portfolio Exposures

• The sector allocations of the international portfolio were similarly muted this week, with only two sectors landing outside the middle three quintiles on a TTM basis.
• Materials kept its lead with a 5% allocation, although this week’s industry contributions differed. All industries except Construction Materials were positive, with Chemicals leading at 3% followed by Metals & Mining at 2%.
• Utilities had the largest negative allocation this week, with a -5% position that placed in the bottom quintile both on a TTM and ITD basis. All industries except Water Utilities were negative, but the position was largely explained by Independent Power and Renewable Electricity Producers, as well as Gas Utilities, both at -2%.
• Communications Services saw a negative 2% allocation that placed in just the 11th percentile ITD. This was driven by both Diversified and Wireless Telecommunication Services.

• The International portfolio had positive Beta and Volatility exposures this week. The beta exposures were driven by the short book, suggesting that investors bet against anti-beta assets, while the volatility exposures were driven by the long book, suggesting that investors favored high-volatility assets.
• Growth exposures were significantly positive, landing in the top decile on a TTM basis. The positive tilt came from both the long and short sides of the book, indicating that investors both bought into high-growth assets and bet against anti-growth assets. Value exposures were varied but largely aligned with historical means.
• Quality factors had a largely negative tilt this week, with Earnings and Investment Quality both placing in the bottom quintile on a TTM and ITD basis. Investors bet against high Earnings Quality in the short book, while buying up anti-Investment Quality assets in the long book.
• Interest Rate Beta flipped from last week’s exposure, with a negative tilt that placed in the bottom quintile TTM. The allocation was driven by the long book, indicating that investors had a preference for stocks with a negative relationship to rising rates.
• HF Crowding was strongly negative this week, placing in the 15th percentile TTM. The allocation was driven by both sides of the book, suggesting that investors bought anti-crowded names and shorted popular longs. Short Interest was also negative but was driven primarily by the long book.

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 fell to the short book this week, notably driven by the Pacific region. Japan in particular contributed -9% to the region’s overall allocation, placing in just the 15th percentile TTM. New Zealand and Israel also had notable negative allocations that landed well into the bottom decile both TTM and ITD.
• Emerging Markets led that way with a positive 9% allocation this week, which was driven overwhelmingly by Asia. China rebounded from its most negative allocation TTM to a strong 26%, landing in the top decile ITD. Korea followed at 10%, also securing a spot in the top quintile of both TTM and ITD.
• Other regions within Emerging Markets remained largely negative, with countries like Qatar and Chile placing in the bottom deciles in both TTM and ITD.

Regards,
Reshma