Dow's Strong Week Amid Rising Inflation & Portfolio Volatility

Market Summary

US Market: 9/1/2023 - 9/7/2023

• US headline indices were up this week. The Dow took the lead, earning 1.18% over the five trading days ending September 14th. The S&P and Nasdaq both followed at 0.80%.
• The Euro fell for a ninth straight week, trading down 5.6% against the dollar. This marks the longest streak of losses since the currency was created over 20 years ago, as markets bet that the European Central Bank has ended its interest rate tightening cycle.
• US CPI data released Wednesday showed August having the biggest monthly increase in inflation this year. It was up 0.6% for the month (seasonally adjusted), and 3.7% year over year, which was largely inline with expectations. Markets expect the Fed to skip a rate hike at next week’s Fed meeting.

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 experienced a 14.3% return over the past week. This return classifies the week as "Volatile" for the first time in four weeks.
• Factors accounted for 28% of this volatility, with industry factors making up around 60% of the total factor performance. This level of factor volatility is the highest the portfolio has seen since the last week of June and is categorized as "Factor-Driven".

International Extreme Movers Volatility and Factor-Driven Speedometers

• International markets were quieter this past week, with a 13.9% return that placed it in the "Neutral" category.
• Factors accounted for 30.1% of the portfolio’s volatility, coming down from a high the week prior. This still places the portfolio in the “Factor-Driven” category.
• Of the total factor performance, industry factors represented close to two-fifths of return, while country and currency factors combined represented another two-fifths.

US Extreme Movers Portfolio Exposures

• Utilities reached the 99th percentile ITD with its 26% long allocation in the book. All industries within Utilities had long allocations: Electric Utilities led at 12%, followed by Multi-Utilities at 10%.
• Information Technology faced challenges after last week’s unusually large long allocation. The sector held a 22% short position, placing it in the bottom decile ITD. The largest contributors to this shift were Semiconductors & Semiconductor Equipment and Software.
• Financials secured a position near the top decile ITD, thanks to its 16% long allocation. Leading this allocation were Capital Markets at 7%, trailed by Insurance and Banks, both at 5%.
• The Industrials sector extended its negative trend with a 12% short allocation. The primary contributors to this allocation were Electrical Equipment, Machinery, and Building Products.

• Most Volatility and Beta factors landed in the bottom decile ITD, influenced by both the long and short sides of the book. This suggests investors preferred anti-beta, low-volatility stocks and avoided high-beta, high-volatility stocks.
• Value, with a particular emphasis on Dividend Yield, had significant exposures influenced by both sides of the book. On the other hand, Growth settled into neutral to negative territory, a shift from last week's growth-centric trend.
• Interest Rate Beta exposure ascended to the top quartile ITD. This entire exposure was driven by the short book, implying that investors fled away from stocks with negative relationship with rising interest rates.

International Extreme Movers Portfolio Exposures

• International markets’ sector exposures behaved similarly to those of the US, with Financials and Utilities leading the long book while Information Technology and Industrials stumbled dramatically.
• The 22% long allocation to Financials primarily came from Banks, which contributed 10.75%, and Insurance, which contributed 8.60%. In contrast, the dominant allocation to Utilities came from Electric Utilities, while Pharmaceuticals was the main driver for the long allocation to Health Care.
• Information Technology had one of the largest short allocations ITD, at the 0th percentile. Semiconductors & Semiconductor Equipment led this short allocation.
• Industrials ranked near its historical low, landing at the 1st percentile. All industries within the sector had short allocations, except for Ground Transportation.

• Style factor exposures closely mirrored those of the US portfolio: underexposures were seen in Vol and Beta factors, Value outperformed Growth, and there was significant exposure to Interest Rate Beta.
• The negative exposure from Beta came from both sides of the book, implying that investors favored low beta names while avoiding high beta ones. The exposure to Vol came exclusively from the short book, suggesting that investors bet against highly volatile names.
• Exposure to Interest Rate Beta hit the top decile TTM, influenced by both the long and short sides of the book.
• The pronounced positive exposure to Short Interest originated solely from the short book, indicating that investors favored unpopular shorts in their short books.

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 and Emerging Markets presented varied allocations this week. Despite the differences, both settled within the middle quintile when assessed on both a TTM and ITD basis.
• The EM Americas allocation reached the top decile ITD. This was predominantly influenced by Brazil, also at the top decile ITD, which accounted for 17% of the 19% total allocation to EM Americas.
• On the flip side, the EM Asia experienced a 19% short allocation, with China singlehandedly accounting for almost all of this percentage, reaching the 12th percentile ITD.

Regards,
David