Rate-Cut Trade Slows Leading Into Year-End

Market Summary

US Market: 12/1/2023 - 12/7/2023

• All US headline indices had modest positive performances this week. The Nasdaq led the upward movement with a 0.47% performance, followed closely by the Dow at 0.46%. The S&P finished last, but still posted positive returns at 0.39%.
• Unemployment numbers showed promise in November, as the Unemployment Rate dropped from 3.9% to 3.7% throughout the month. The economy added 199,000 jobs in this timeframe, hinting the possibility of a “soft landing”, which refers to reaching inflation levels of 2% without the need of an economic recession.
• Prices for durable goods (products that are meant to last for more than 3 years), have experienced deflation on a year over basis and dropped 2.6% in October. This deflationary trend for these products may help offset for inflation in other sectors pushing us closer to the Fed’s 2% inflation target.

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 returned 16.8%, classifying the week as “Volatile”, and reaching the 73rd percentile TTM and the 77th percentile ITD.
• Factors accounted for 25.5% of this week’s total volatility, classifying the week as “Neutral”, and landing in the middle quintile both on a TTM and ITD basis.
• Industry factors accounted for about 60% of the factor volatility. This contribution was led primarily by Real Estate, followed by Consumer Durables & Apparel, Banks, Energy E&P, and Capital Goods.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers Portfolio returned of 16.4% this week, placing it in the 84th percentile over the trailing twelve months and the 68th percentile ITD. This week’s volatility is classified as “Volatile”.
• Factors accounted for 25% of this week’s return categorizing the week as “Neutral”. That 25% marks the 44th percentile TTM.
• Country factors led the charge, accounting for 2.32% of the total volatility, followed by Sector factors that accounted for 1.43%.

US Extreme Movers Portfolio Exposures

• Consumer Discretionary and Real Estate tied as the top top sector allocations this week at 14% each. These allocations landed in the top quintile and top decile respectively over the trailing twelve month and since inception periods.
• Most industries within Consumer Discretionary were positive this week, with the exception of Broadline Retail. Household Durables and Specialty Retail both drove the sector with 6% allocations each. Real Estate continued its positive allocations from last week, with Office REITs keeping the lead allocation at 7%.
• Energy was the largest negative allocation in this week’s portfolio, landing in the bottom decile TTM and ITD with a -25% allocation. Almost 80% of this was driven by Oil, Gas, & Consumable Fuels alone, while Energy Equipment & Services drove the other 20%.
• Information Technology saw a large swing from last week’s positive allocation, landing in the bottom 3 sectors with a -11% allocation. Semiconductors led this change with a -11% allocation of its own, which was partially offset by a positive allocation to Software.

• The US Portfolio saw moderate levels of Volatility and Beta compared to last week, with most indicators landing near the 50th percentile ITD. The positive exposures came from the long side of the book, implying that investors favored high-beta high-vol names.
• Growth leaned very negative, reaching the bottom decile TTM this week, while Value remained mixed across its indicators. The negative Growth exposure was driven by both sides of the book, suggesting that investors favored anti-growth names and sold high growth names. Both sides of the book also contributed to the positive Dividend Yield and negative Earnings Yield exposures.
• Profitability remained very negative this week, with its exposure landing in the bottom decile ITD. The long side of the book was the primary driver of this, implying that investors loaded up on names with low profitability.
• Hedge Fund Crowding and Short Interest were both positive exposures this week, although HF Crowding exposures were fairly neutral landing near the 50th percentile TTM. Both exposures were driven primarily by the long side of the book.

International Extreme Movers Portfolio Exposures

• Industrials led the International portfolio this month at 13%, reaching the top decile TTM and ITD, followed by Financials at 9%, reaching the top quartile TTM and ITD.
• The Industrials exposure was fairly distributed across industries, although Aerospace & Defense, Commercial Services & Supplies, and Passenger Airlines led the way, each with allocations over 2%. In contrast, the Financials allocation was more concentrated, with Banks accounting for 5% of the total sector allocation.
• Information Technology has the largest negative exposure in the International portfolio, reaching a -12% allocation that was in the lowest decile since inception. This was led primarily by Semiconductors & Semiconductor Equipment, as well as Electronic Equipment, Instruments, and Components.
• Materials also fell into short territory this week, after topping the portfolio last week, with an allocation of -7%. This swing was equally driven by Chemicals and Metals & Mining, which each contributed close to -4%.

• Unlike the US, the International Portfolio saw very negative exposures to Volatility, landing in just the 3rd percentile TTM this week. This was driven almost entirely by the short book, indicating that investors sold high-vol names. Beta was moderately negative as well, but driven by the long side of the book. This suggests that investors favored buying anti-beta names.
• Growth pushed further negative, while Value factors turned positive across the board. Growth was driven by the short book, indicating an aversion to high-growth names. Value indicators were mixed, but both Dividend Yield and Earnings Yield were primarily driven by the short book, suggesting that investors tilted away from low-yielding names.
• Oil Beta turned significantly negative, reaching the bottom decile TTM. Both sides of the book were negative, though the exposure was driven by the short allocation. This suggests that investors primarily shorted names with positive correlation to Oil Prices, but also bought some names with negative correlation to Oil Prices.
• Hedge Fund Crowding was very positive, landing in the 99th percentile TTM, and led by the short book. Short Interest was also positive and led by the short book, landing in the 70th percentile TTM.

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 increased their positive exposure from last week, reaching the 92nd percentile TTM. Europe & Middle East was largest regional contribution at 15%, although Japan had the highest country-level allocation at 8%. Other top allocations included the UK, Sweden, Canada, and Australia.
• Emerging Markets had a -30% allocation this week, reaching the 4th percentile TTM. The large negative exposure was driven almost exclusively by China, which continued to have a -46% allocation. Asia was negative overall, with South Korea and Taiwan also contributing significantly.
• The Americas were the only positive region within Emerging Markets, with Mexico and Chile driving 3% and 2% respectively. Both countries’ allocations were in the top quintile since inception.

Regards,
Reshma