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Debt Ceiling Fears Loom Over the Markets, But We Launched a New Website Anyway

Tree in a field

Before we slide into this week's analysis, my colleagues and I are thrilled to inform our readers that Omega Point just rolled out its updated website. We've designed the new site to be information-rich, making it easy to learn more about turning data into decisions and how Omega Point helps customers achieve their investment goals. Some highlights I'd like to point out include:

We hope you can take a look and encourage you to check back regularly, as we plan to post much new content in the months ahead. Also, don't hesitate to contact our team using the site links to provide your feedback, learn more about topics of interest, or lock-in a time to speak with us about a customized demo for you and your team.

Now that we have that exciting news out of the way, let’s move on to this week’s analysis.

Last year, we introduced Extreme Movers, the latest tool in our arsenal to understand what is driving markets from week to week. In our January 8 edition, we analyzed the historical behavior of the US Extreme Movers portfolio to better contextualize recent markets in light of how they stack up against periods dating back to 2007. In addition, we used that historical data to better categorize markets by how volatile and factor-driven they are. This week, we will expand that contextual analysis to both the US and International Extreme Movers portfolios to give our readers a sense of the current climate that fundamental managers face.

The Extreme Movers portfolios are weekly-rebalanced, market-neutral portfolios that consist of the top decile of stocks from the Russell 1000 and MSCI ACWI ex-US, respectively, based on performance on the long side and the bottom decile on the short side. You can find additional information on the construction of the Extreme Movers portfolios in the May 22, 2022, edition of Factor Spotlight.

Market Summary

US Market: 1/13/2023 - 1/19/2023

  • The US market reverted into the red this week. The Dow suffered the most with a -3.4% return through the five trading days ending January 19th, while the S&P 500 and Nasdaq followed at -2.12% and -1.4%, respectively.
  • Google announced it would cut approximately 12,000 jobs, continuing the trend of steep workforce layoffs across the tech sector.
  • The US hit its debt ceiling on Thursday, forcing the Treasury Department to consider dramatic moves to prevent the government from defaulting on its debt.

Extreme Movers Portfolio Performance

Please note that the portfolio's return will always be positive by constructing a portfolio that is long the top movers and short the bottom movers in an index. That said, both the total return and decomposition of that return provide valuable insight into the conditions of the market. Earlier this year, we introduced a new framework to categorize weeks by how volatile and factor-driven they are based on the Extreme Movers portfolios. We leveraged that framework below to provide context around how this most recent week compares to historical markets back to 2007. What we want to observe is:

  1. How volatile was this week? Because the Extreme Movers portfolios invest in the best and short the worst performers of the week, the total return of the portfolios points to the volatility spread available in the market. A large return suggests a wide dispersion of stock returns, while a smaller one suggests a light dispersion and calmer markets. We will categorize each week on a scale of "Very Calm" to "Very Volatile."
  2. Was the market alpha-driven or factor-driven? By decomposing the total return into its underlying components, we can determine whether the aforementioned volatility spread provided fundamental investors with opportunities for alpha or factor noise, making alpha harder to come by. We will categorize each week on a scale of "Very Alpha-Driven" to "Very Factor-Driven."

US Extreme Movers Volatility and Factor-Driven Speedometers

  • This week, the US Extreme Movers portfolio returned 12.6%, which historically lands at the 51st percentile, which we categorize as a "Neutral" period by volatility.
  • This week marks the first “Neutral” week of volatility since July.
  • 29.3% of the US portfolio's performance was driven by factors, landing in the second quintile historically and labeled "Factor-Driven."

International Extreme Movers Volatility and Factor-Driven Speedometers

  • The International Extreme Movers portfolio landed in "Neutral" territory this week in volatility and factor-driven categories relative to its history.
  • A more moderate week of volatility brought welcome calm for investors. Over the trailing twelve months, 75% of weeks have been at least "Volatile," and more than half of those weeks have been "Very Volatile."
  • The same situation applies to factor influence in the ex-US market. 73% of weeks over the trailing twelve months have been at least "Factor-Driven." A neutral week provided fundamental investors with an increased opportunity to uncover alpha.

US Extreme Movers Portfolio Exposures

Looking at the Extreme Movers from an exposure lens helps us decompose the individual styles and sectors associated with the portfolio's factor-driven performance and better understand broader patterns such as risk-on / risk-off or sector rotation.To provide a relative perspective on the size of the exposures, we’ve included a third column that represents where the exposure ranks in the trailing twelve-month (“TTM”) percentile (“Ptile”).

  • The US portfolio leaned heavily into tech this week. The Information Technology sector represented an 18% long allocation led by IT Services and Software, while Biotech led Health Care which held the second largest long position.
  • Financials were only moderately short this week, but the sector was dispersed across industry. Capital Markets landed at a 7% long allocation while Banks were out of favor showing a 9% short.
  • Utilities were the most significant short sector allocation this week at -17% because the market moved into high beta and growth and away from value and momentum factors this week.
  • Beta & Volatility factors continued to lead the style characteristics this week as cautious economic optimism guided investors into riskier stocks.
  • Growth factors were more in favor this week, and the portfolio took a stance against value and quality factors which was driven heavily by the large long allocations to Software and IT Services.
  • The US portfolio was both long and short popular hedge fund longs, indicating that, while managers likely saw some tailwinds in their long books, they probably found challenges in their shorts this week.

International Extreme Movers Portfolio Exposures

  • Industrials was by far the largest long sector allocation this week at 14%. That position was made up mainly of Japanese Machinery stocks.
  • The short allocation to Real Estate was concentrated in Real Estate Management & Development stocks in Hong Kong despite easing COVID Zero policy and reopening plans.
  • The International Extreme Movers portfolio held a similar posture as the US version this week regarding growth and value factors. The long allocations to Information Technology and Industrials accounted for much of the exposures.
  • Residual volatility factors were mainly out of favor due to the underweight of Consumer Discretionary stocks, which also worked to keep the portfolio's exposure to beta factors reasonably neutral.

Regards,
Kevin

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