Financials Lead the Way as Earnings Season Heats Up

Market Summary

US Market: 7/14/2023 - 7/20/2023

• US headline indices saw a mixed performance this week during earnings season. Some of the most affected stocks were Discover Financial Services, Netflix, and Tesla.
• The Dow posted strong returns of 2.41% over the week, achieving the longest consecutive winning streak since 2019 (9 days). The Dow’s 1-day returns on Monday were the highest YTD. Meanwhile, the S&P came in second, at a modest 0.55%. The Nasdaq was the only index of the three that performed negatively, with returns of -0.53%.
• Writers and Artists continue to strike. The union, made up of both the WGA and the SAG-AFTRA, is protesting against the use of AI for screenwriting and AI-powered background actors. They are also protesting for better pay from streaming services.

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

• Volatility continued as markets navigated a mixed earnings season. The 14.8% return for the US Extreme Movers Portfolio represents the most volatile week in over a month, situating the portfolio's performance in the 67th percentile ITD.
• Factors accounted for 23.6% of the total portfolio volatility. This categorizes the week as “Neutral”, situating it close to its historical median, at the 49th percentile.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The 13.6% return on international markets remained surprisingly low, even as it represented the most volatile week in over a month. It ranked only in the 12th percentile for the past twelve months and the 35th percentile year-to-date (YTD). The overall market performance continues to hold steady in calm territory.
• Factor contribution to return decreased significantly, dropping from 28.7% to 20.2% this week. This places the current week's factor contribution in the 14th percentile on a trailing twelve-month (TTM) basis and the 19th percentile year-to-date (YTD).

US Extreme Movers Portfolio Exposures

• Financials were once again a significant long allocation in the US portfolio this week. The 33% position was driven by a 21% long allocation to Banks and a 14% long allocation to Financial Services.
• Information Technology’s positioning was divided at an industry level. Software & Services claimed an 18% long allocation while the portfolio was short Technology Hardware & Equipment to the tune of -7%.
• Hotels, Restaurants, & Leisure was the lone long position in Consumer Discretionary. Specialty Retail led the shorts at -4%.
• Half of the portfolio’s 8% short allocation to Health Care was made up of Health Care Equipment & Supplies stocks, while Biotech followed at a -3% allocation.

• Style factors generally moved closer to neutral across the board this week as factor influence quieted through Earnings Season.
• The portfolio saw positive exposures to beta, residual volatility, and value factors but remained fairly neutral on Growth. The long allocation to Financials was a key driver in all of those exposures, while Information Technology also added to the Beta bias.
• Quality factors remained in negative territory as investors have placed less of a premium on profitability and quality of earnings in favor of Beta.
• The Financials rally also provided a tailwind for interest rate-sensitive stocks as exposure to Wolfe’s Interest Rate Beta factor moved into positive territory.

International Extreme Movers Portfolio Exposures

• Similar to the US portfolio, Software & Services, and Technology Hardware & Equipment drove the long allocation to Information Technology in the International Extreme Movers portfolio.
• Though not as big as the allocation in the US, Financials stocks were in favor globally. Banks and Financial Services were the key industry winners.
• Asian stocks led the 9% and 7% short allocations to Consumer Discretionary and Consumer Staples, respectively. The portfolio leaned most away from Specialty Retail, Textiles, Apparel, & Luxury Goods, and Food Products.

• For the second week in a row, the International portfolio had elevated exposures to beta factors but negative exposures to residual volatility factors.
• South Korean stocks in Industrials and Information Technology led to a strong underexposure to Earnings Quality and Investment Quality. The -0.29 exposure to Barra’s Earnings Quality factor landed in the 2nd percentile on a trailing twelve-month basis and the 8th percentile since inception.
• The portfolio moved into an anti-Oil and anti-Rate posture this week which wasn’t concentrated in any particular sector. International stocks that benefit from rising commodity prices and interest rates likely felt some increased downward price pressure.

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.

• Investors favored Developed Markets over Emerging Markets again this week (though to a lesser degree). The -17% allocation to Emerging Markets fell in the 23rd percentile on both a TTM and ITD basis.
• China was again the largest short allocation on a country basis due largely to stocks in the Consumer Discretionary and Financials sectors.

Regards,
David